Calcutta High Court (Appellete Side)
Industries Limited & Another vs Reserve Bank Of India & Others on 1 September, 2009
Author: Sanjib Banerjee
Bench: Sanjib Banerjee
IN THE HIGH COURT AT CALCUTTA
CONSTITUTIONAL WRIT JURISDICTION
APPELLATE SIDE
PRESENT:
THE HON'BLE JUSTICE
SANJIB BANERJEE
WP No. 7729 (W) of 2009
HINDUSTHAN NATIONAL GLASS &
INDUSTRIES LIMITED & ANOTHER
-Versus-
RESERVE BANK OF INDIA & OTHERS
Mr. Abhijit Chatterjee
Mr. Ratnanko Banerjee
Mr. Arindam Banerjee
Mr. Arvind K. Jhunjhunwala
Ms. Anshumala Bansal
...For the Petitioners.
Mr. Anindya Kumar Mitra
Mr. Joydip Kar
Mr. Subhojit Roy
Mr. Dharam Jumani
Ms. Debosri Datta
...For the Respondent No. 2.
Mr. D. Sen
...For the Reserve Bank of India.
Mr. Kunaljit Bhattacharjee.
...For the Respondent No. 6.
Hearing concluded on: August 27, 2009.
Judgment on: September 1, 2009.
SANJIB BANERJEE, J. : -
The writ petitioners question a decision of April 7, 2009 by the grievance
redressal committee of the respondent private bank declaring the petitioner
company to be a willful defaulter within the meaning of a Reserve Bank of India
master circular dated July 1, 2008. There are several levels on which the
challenge has been launched. The petitioners allege that the master circular is
unconstitutional and, in any event, the grievance redressal mechanism
contemplated thereunder is a meaningless, facile exercise. They say that even if
the master circular is upheld in its entirety, the relevant committee of the bank
may still be found to have acted without jurisdiction since the master circular
applies to lender-borrower transactions between a bank and another; and, the
nature of the agreement which is the subject matter of the proceedings did not
involve a lender-borrower relationship between the bank and the petitioner
company. The petitioners also allege violation of the principles of natural justice
in the bank committing procedural impropriety and maintain that the decision is
tainted by institutional and personal bias.
The prayers are resisted primarily by the Kotak Mahindra Bank and by the
Reserve Bank of India. These respondents say that since the principal act
complained of is of a private bank, a petition under Article 226 of the
Constitution is inappropriate. They claim that there is an efficacious alternative
remedy available by way of arbitration which should deter the Court from
entering into the factual disputes and onerous matters involving commercial and
banking expertise. The private bank claims that the Reserve Bank has been
impleaded and the legality of the master circular questioned to present a façade
of maintainability and only to ward off a summary dismissal of the petition. The
bank says that it is not shy of meeting the real challenge since the Reserve Bank
of India Act, 1934 and the guidelines issued by the central bank would
demonstrate that it was and continues to be a lender-borrower relationship
between the bank and the petitioner company in respect of the matters covered
by the relevant agreement. The bank insinuates that the proceedings were
instituted and have now been unnecessarily stretched to keep the serious
consequence of the petitioner being declared a willful defaulter at bay.
The petitioners say that in January, 2006 the bank approached the
company for entering into derivative transactions relating to hedging foreign
exchange fluctuation risks. The petition speaks of the company having an
exposure of US $ 5 million in respect of an external commercial borrowing. The
petition says that on or about March 14, 2007, "in the guise of derivative
contract" Kotak Mahindra Bank induced the petitioner company to enter into a
range accrual transaction. The petitioners claim that such range accrual
transaction is not a derivative transaction or otherwise permitted in law.
According to the petition, a substantial payout became imminent under the range
accrual transaction by or about the end of August, 2007 whereupon the
petitioner company took up the matter with the concerned officials of Kotak
Mahindra Bank and entered into a new agreement on September 6, 2007. The
petitioners allege that the company had been deceived into entering such
subsequent agreement under which only the original currency pair of Euro and
US dollar was changed to US dollar and Swiss Franc. The bank apparently made
a demand in the sum of US $ 600,000 on the company in March, 2008 which
shot up to Rs.14,62,61,186.69 being the Indian equivalent of the dollar claim by
October 22, 2008.
In April, 2008 the bank invoked the arbitration clause said to be contained
in the agreement between the parties following which the company instituted TS
No. 1475 of 2008 before the City Civil Court at Calcutta claiming a declaration
that the agreements of March 14, 2007 and September 6, 2007 were illegal, null
and void and not enforceable and consequential reliefs in respect of the claims
made by the bank on the company. On May 6, 2008 the company made a
representation to the Reserve Bank claiming that the transaction between the
company and Kotak Mahindra Bank was not in derivatives and otherwise invalid.
The company contended that the transaction was a capital account transaction
under a set of regulations brought in by the Foreign Exchange Management Act.
The prelude to the challenge launched in these proceedings is covered in
the first 16 paragraphs of the petition. The real grievance appears in the 50-odd
pages thereafter. Kotak Mahindra Bank issued a notice on October 22, 2008
asking the petitioner company to show cause as to "why it should not be declared
as a willful defaulter ... (and) the Bank ... (not) make appropriate disclosures with
the Reserve Bank of India, the Securities and Exchange Board of India, the Credit
Information Bureau (India) Limited" under the master circular of July 1, 2008
issued by the Reserve Bank. The petitioner company furnished an initial reply on
November 4, 2008 asserting that since the bank's claim had not crystallised it
had falsely invoked the guidelines which applied "solely in case of a lender and
borrower relationship" and followed it up with another letter of November 21,
2008 emphasising that, in the context of the relevant transaction, the bank was
neither a lender nor the company a borrower. The petitioners allege that the
notice of October 22, 2008 was illegal and had been issued without jurisdiction.
The petitioners say that the legality of the transaction has been questioned in the
suit and is also in issue in the arbitration reference brought by the bank. The
petitioners insinuate that the invocation of the Reserve Bank guidelines by Kotak
Mahindra Bank is to coerce the company to give in to the wrongful claim of the
bank or suffer the ignominy of being branded as a willful defaulter and the
attendant consequences of being willy-nilly denied credit facilities by other banks
and financial institutions.
On February 2, 2009 the bank wrote to the petitioner company that its
replies of November 4 and November 21, 2008 had been forwarded to the
grievance redressal committee of the bank for further consideration and such
committee had fixed a meeting on February 25, 2009 for according the company
a hearing. The company sought an accommodation and requested a hearing in
Calcutta rather than in Mumbai. The bank postponed the hearing but informed
the company that it would take place in Mumbai. A detailed submission was
made on behalf of the petitioner company by a letter dated March 6, 2009, the
significant contentions wherein are as follows:
"8. It is our client's specific case that the master circular issued by
Reserve Bank of India on willful default does not apply to foreign exchange
derivative transactions and is restricted only to the acts of lending by the
bank and borrowing by Bank's constituents. In the instant case, there has
been no lending by the Bank or borrowing by our client in any manner. A
copy of the master circular on willful default is annexed hereto and marked
Attachment VII.
"9. In the circumstances, it our client's humble submission that the
claim for willful default made by Kotak Mahindra Bank Ltd. is baseless
and, in any event, pre-mature and cannot be looked into by the Grievance
Redressal Committee at this stage when the entire matter is sub-judice and
especially when the Reserve Bank of India has also expressed its inability
to look into the same on this ground along.
"10. We further state that vide our letter dated November 21, 2008
addressed to Mr. Prakash Jaodekar of the Grievance Redressal Committee
of the Bank, we had forwarded a copy of our letter dated November 4, 2008
to him. Thereafter, vide our letter dated February 10, 2009 our client had
requested for the representation hearing to be fixed in Kolkata. By a letter
dated February 20, 2009 Kotak Mahindra Bank Ltd. communicated its
inability to accede to our request to convene meeting in Kolkata. A copy
each of the said letters dated November 21, 2008, February 10, 2009 and
February 20, 2009 is annexed hereto and collectively marked Attachment
VIII.
"11. In the circumstances, we are filing herewith our client's written
representation with your goodselves so that you may consider our client's
submissions as aforesaid and drop the entire proceedings on alleged willful
default. However, if despite this written representation, if you are still not
satisfied with our client's submissions in the matter, you may indicate the
reasons thereof to us and/or to our client and afford our client an
opportunity to represent its case further in person through us, for which
necessary date, time and place may also be communicated to us/our client
sufficiently in advance."
Simultaneously with the company questioning the basis of the bank
invoking the guidelines contained in the master circular against the company, it
made a representation on March 6, 2009 to the foreign exchange department of
the Calcutta office of the Reserve Bank insisting that the range accrual
transaction did not amount to any lending by Kotak Mahindra Bank or any
borrowing by the company.
By its letter of March 16, 2009 the bank informed the company that the
company's letter of March 6, 2009 had been referred to the grievance redressal
committee. The company was told that the committee had decided to give the
company a hearing on March 28, 2009.
It was upon receipt of the bank's letter of March 16, 2009 that the
petitioners brought WP No. 269 of 2009 before this Court praying for the
following principal relief and assailing the authority of the bank to proceed
against the company under the said master circular:
"a) A writ of or in the nature of Mandamus be issued directing the
respondents, their servants and agents to act in accordance with law and
to refrain from taking any steps or any further steps in the matter of
proceeding against the petitioner no. 1 as a willful defaulter."
Since it was only a show-cause notice that had been challenged, the Court
refused to receive the petition and left the company free to urge all points before
the grievance redressal committee. The operative part of the order dated March
27, 2009 provided,
"This Court has heard learned senior Counsel for the parties. The
petitioner's conduct does not entitle it to grant of discretionary relief in its
favour. By its letter dated 10th February, 2009, the petitioner had prayed
for postponement of hearing without raising any demur that the Grievance
Redressal Committee lacks jurisdiction to proceed further. Having prayed
for adjournment which was granted, it appears that the petitioner was
attempting to buy time.
"So far as the contention regarding the Committee making up its
mind to classify the petitioner as 'wilful defaulter' and then asking it to
appear for a hearing is concerned, it appears that the Reserve Bank of
India guidelines provides so and has been followed. In the absence of a
challenge to the guidelines, the bank cannot be held to be at fault.
Additionally, in the considered view of this Court, challenge to the show
cause notice, at this stage, should not be entertained particularly when the
question of jurisdiction can also be raised before the Committee which is to
decide the issue. This Court does not consider this case to be a fit and
proper one for exercise of writ powers.
"The writ petition stands dismissed.
"However, no opinion is expressed on merits of the petitioner's claim
and all points are left open for being agitated by it before the Committee."
Despite its reservations, the petitioner company had per force to present
itself before the bank's committee. Shortly after the hearing in Mumbai, the
salient points of its submission before the committee were recorded on behalf of
the company by a letter of by a letter of March 30, 2009. The company recorded
that advocates were in attendance on behalf of the bank in course of the hearing
who had given "direction to the thinking faculty of the committee." The letter
recounted that it had been urged on the company's behalf that the master
circular on willful default applied only to a lender-borrower relationship
whereupon the chairman of the committee had remarked that a derivative
transaction was a non-funded facility and became a funded facility upon the
amounts becoming due under the contract. The letter complained of lack of
procedural due process in that the grievance redressal committee was required to
have before it a previous decision of a "Committee of Higher functionaries", under
clause 3 of the master circular. The company argued that it was not in the know
as to whether such a previous committee had been constituted or it had rendered
a decision since nothing in such regard had been informed to the company. The
letter recorded that certain other information sought by the grievance redressal
committee relating to the working of the board of directors of the company in
respect of derivative transactions could not be furnished since the company was
not required by any previous demand to furnish such information and the
authorised representative of the company was not posted with the relevant facts.
It was pointed out that the company's authorised representative had sought a
copy of the attendance sheet but was not provided the same, though inspection
thereof was permitted and the names of those in attendance were allowed to be
taken down.
On March 30, 2009 the company sent an electronic message to the bank
asserting that the bank's electronic mail of March 28, 2009 requiring the
company to furnish answers to nine questions by close of business hours on
March 30, 2009, had only been accessed by the company on the first working
day after March 28, 2009. The company sought time till April 4, 2009 to consider
the queries and respond to the same. The bank allowed time till close of business
on April 3, 2009.
The petition says that though the company was not obliged to respond to
the queries as they were beyond the scope of the matter before the grievance
redressal committee and amounted to self-incriminating evidence being called
for, the company answered the questions via an electronic message on April 3,
2009.
On March 31, 2009 the company made a further representation to the
Reserve Bank to intervene and ensure that the provisions of the master circular
of July 1, 2008 were not misused by Kotak Mahindra Bank. By a letter of April 7,
2009 addressed by Kotak Mahindra Bank to the foreign exchange department of
the Calcutta office of the Reserve Bank, the private bank informed the central
bank that it had duly invoked the relevant master circular and upon following
"the procedure set out therein", its grievance redressal committee had declared
the company as a willful defaulter on April 7, 2009. A copy of such letter was
forwarded to the company. The decision of April 7, 2009 reached the company
thereafter. Over four pages and a bit, the committee recorded the basis for
declaring the company a willful defaulter under the master circular. The principal
reasons furnished in discarding the company's contention that the transaction
relevant transaction was beyond the pale of the master circular, appear from the
following:
"8. Further, the Committee observed that derivative transactions are
expressly permitted under the Reserve Bank of India Act, 1934 and are
valid so long as one of the parties thereto is a bank or authorized dealer
regulated by the Reserve Bank of India. Having regard to the provisions of
the RBI Act and considering that there is no ruling or decision by any court
whatsoever holding that derivative transactions are speculative and/or are
wagering contracts and are therefore illegal, the Committee opined that the
Company's allegations in this regard are baseless.
"9. On review of the Company's representations, and on the basis of the
relevant records, the Committee has found that the Bank and the
Company entered into the ISDA Master Agreement, in respect of which the
Company had furnished several authorizations, representations and
declarations inter alia confirming that (i) the Company was authorized to
enter into derivative transactions; (ii) the Company would enter into
derivative transactions only to hedge specific underlying exposure; (iii) the
Company was not relying on any advice of the Bank and was taking
independent advice; (iv) the Bank was not acting in a fiduciary capacity
and all transactions were at arms length; and (v) the Company had drawn
up an appropriate risk management policy, etc. Subsequently, upon your
instructions and relying on further representations made by you, the Bank
permitted you to enter into inter alia the Option Transaction bearing
reference no. FXOPT 20536, 20540, 20544, Range Accrual on September 6,
2007. The Deal confirmation issued in respect of the Transaction also
repeats the aforesaid representations. The Bank has complied with its
obligations in law and in respect of the Transaction and the Company has
also acted upon the ISDA Master Agreement and the Transaction. The
Committee was therefore of the opinion that the ISDA Master Agreement
and the Transaction are valid and binding upon the Bank and the
Company.
"10. The Committee thereafter proceeded to consider the Company's
contention that the provisions of the RBI Master Circular were applicable
only to a 'borrowal' account and where there exists a lender - borrower
relationship between the Bank and the other party and cannot and could
not have been made applicable to your default in respect of the
Transaction. The Committee also considered that the terms 'borrower' or
'lender' in the RBI Circular are colloquial in usage and are a subclass of the
wider debtor/creditor relationship. Further, the financial facilities
sanctioned by a bank and availed by a customer are conventionally
referred to as a borrowing by the customer and the customer's account is
therefore generally referred to and called a borrowal account. In this
regard, the committee also placed reliance on Section 45A of the RBI Act,
1934, which defines the term "borrower" as any person to whom any credit
limit has been sanctioned by any banking company. Such credit facilities
include fund-based as well as non-fund based facilities and therefore a
customer is considered to be a defaulter irrespective of whether it fails to
repay the money borrowed under any fund-based facility or fails to pay the
monies that may have become due under a non-fund based facility. This is
further evidenced by the strict prudential norms issued by the RBI in
relation to recognition of non-performing assets which include dues to
banks arising out of loan transactions as well as derivative transactions. In
light of the above, and also that the Bank had sanctioned and you had
availed of a derivative facility limit, which is a non fund-based credit
facility, and entered into inter alia the Transaction, the Committee opined
that your contention that a derivative facility does not constitute a
'borrowal' account was untenable and was therefore disregarded."
"20. The Bank shall be reporting the said declaration to RBI, CIBIL or
such other agency/institution as directed by RBI. All the other processes
and procedures as are required to be followed in terms of the Master
Circular of Reserve Bank of India issued vide DBOD
No.DL.BC.1/20.16.003/2008-09 dated July 01, 2008 shall be carried out
following your declaration as a willful defaulter."
The petitioners are presented three threshold barriers before the substance
of their complaint can be aired. The private bank suggests that the prayers in the
petition have been window-dressed to present the pretense of an apparently
permissible invocation of this jurisdiction. The bank insists that it is privately
managed and is neither a state nor an Article 12 authority by its constitution;
nor does it discharge any public duty. The appearing respondents refer to Section
18 of the Credit Information Companies (Regulation) Act, 2005 that provides for
statutory arbitration. The banks also contend that in the petitioners not having
challenged the validity of the master circular in their earlier essay in this
jurisdiction and the petitioners having otherwise failed in that previous attempt,
the present proceedings are barred by the principles of constructive res judicata
or directly hit by res judicata.
But before the question of maintainability of the petition under Article 226
of the Constitution and other threshold issues are taken up, the salient features
of the master circular issued by the Reserve Bank on July 1, 2008 need to be
noticed:
"RESERVE BANK OF INDIA
Master Circular - Wilful Defaulters"
"Purpose:
To put in place a system to disseminate credit information pertaining to
willful defaulters for cautioning banks and financial institutions so as to
ensure that further bank finance is not made available to them."
"1. Introduction
Pursuant to the instructions of the Central Vigilance Commission for
collection of information on wilful defaulters of Rs.25 lakhs and above by
RBI and dissemination to the reporting banks and FIs, a scheme was
framed by RBI with effect from 1st April 1999 under which the banks and
notified All India Financial Institutions were required to submit to RBI the
details of the wilful defaulters. Wilful defaulter broadly covered the
following:
...
"Accordingly, banks and FIs started reporting all cases of wilful defaults, which occurred or were detected after 31st March 1999 on a quarterly basis. It covered all non-performing borrowal accounts with outstandings (funded facilities and such non-funded facilities which are converted into funded facilities) aggregating Rs.25 lakhs and above identified as wilful default by a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs. Banks/FIs were advised that they should examine all cases of wilful defaults of Rs. 1.00 crore and above for filing of suits and also consider criminal action wherever instances of cheating/fraud by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were advised that they report wilful defaults to other participating/financing banks also. Cases of wilful defaults at overseas branches were required be reported if such disclosure is permitted under the laws of the host country."
"2. Guidelines issued on wilful defaulters Further, considering the concerns expressed over the persistence of wilful default in the financial system in the 8th Report of the Parliament's Standing Committee on Finance on Financial Institutions, the Reserve Bank of India, in consultation with the Government of India, constituted in May 2001 a Working Group on Wilful Defaulters (WGWD) under the Chairmanship of Shri S.S. Kohli, the then Chairman of the Indian Banks' Association, for examining some of the recommendations of the Committee. The Group submitted its report in November 2001. The recommendations of the WGWD were further examined by an In House Working Group constituted by the Reserve Bank. Accordingly, the Scheme was further revised by RBI on May 30, 2002.
...
"2.1. Definition of wilful default The term "wilful default" has been redefined in supersession of the earlier definition as under:
A "wilful default" would be deemed to have occurred if any of the following events is noted:-
(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender."
"2.5 Penal measures In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters (non-suit filed accounts) and list of wilful defaulters (suit-filed accounts) are forwarded to SEBI by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively.
The following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated at paragraph
2.1 above:
...
It would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action."
"2.9 Reporting to RBI/CIBIL Bank/FIs should submit the list of suit-files accounts of wilful defaulters of Rs.25 lakh and above as at end-March, June, September and December every year to Credit Information Bureau (India) Ltd. (CIBIL) and/or any other credit information company which has obtained/would obtain certificate of registration from RBI in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005 and of which it is a member. Banks/FIs should, however, submit the quarterly list of wilful defaulters where suits have not been filed only to RBI in the format given in Annex 1."
"3. Grievances Redressal Mechanism Banks/FIs should take the following measures in identifying and reporting instances of wilful default:
(i) With a view to imparting more objectivity in identifying cases of wilful default, decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI.
(ii) The decision taken on classification of wilful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out the reasons for which the borrower has been declared as wilful defaulter vis-à-vis RBI guidelines.
(iii) The borrower should thereafter be suitably advised about the proposal to classify him as wilful defaulter along with the reasons therefor.
The concerned borrower should be provided reasonable time (say 15 days) for making representation against such decision, if he so desires, to a Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials.
(iv) Further, the above Grievance Redressal Committee should also give a hearing to the borrower if he represents that he has been wrongly classified as wilful defaulter.
(v) A final declaration as 'wilful defaulter' should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised."
"4. Criminal Action against Wilful Defaulters "4.1 J.P.C. Recommendations Reserve Bank examined, the issues relating to restraining wilful defaults in consultation with the Standing Technical Advisory Committee on Financial Regulation in the context of the following recommendations of the JPC and in particular, on the need for initiating criminal action against concerned borrowers, ..."
"5.1 Need for Ensuring Accuracy RBI/CIBIL disseminate information on non-suit filed and suit filed accounts respectively, as reported to them by the banks/FIs and responsibility for reporting correct information and also accuracy of facts and figures rests with the concerned banks and financial institutions. Therefore, banks and financial institutions should take immediate steps to up-date their records and ensure that the names of current directors are reported. In addition to reporting the names of current directors, it is necessary to furnish information about directors who were associated with the company at the time the account was classified as defaulter, to put the other banks and financial institutions on guard. Banks and FIs may also ensure the facts about directors, wherever possible, by cross-checking with Registrar of Companies."
The petitioners refer to divers provisions of the Banking Regulation Act, 1949 and contend that Sections 5A, 8, 9, 10A and 10BB of such Act confer absolute authority on the Reserve Bank to control and monitor the business and affairs of every banking company. The petitioners say that from the very inception of banking business by a bank to the manner in which such business would be conducted and the all-pervasive directions and powers of the Reserve Bank which a bank is subjected to, demonstrate the extraordinary, sweeping and omnibus authority of the Reserve Bank; such that every bank would be a state or authority within the meaning of Article 12 of the Constitution. The petitioners place Section 22 of the Act that mandates a previous licence to be obtained before any banking business can be commenced; the extent of control exercised by the Reserve Bank under Section 23; the wholesome directions that can be issued by the Reserve Bank under Section 35A; the incisive powers available to the Reserve Bank under Section 36; the authority of the Reserve Bank to remove managerial and other officers under Section 36AA; and, the power vested in the Reserve Bank to appoint directors in banking companies under Section 36AB.
The petitioners cite a judgment reported at 98 (2002) DLT 234 (Delhi Stock Exchange v. K.C. Sharma) and rely on paragraphs 31, 32, 40 and 61 thereof to suggest that if a stock exchange run by its independent board or committee can be found to be amenable to the writ jurisdiction by virtue of the control exercised over it by statutory authorities, the same test should hold good for any bank. The Delhi High Court's view that the stock exchange was a "state" within the meaning of Article 12 of the Constitution was upheld by the Supreme Court in the judgment reported at (2005) 4 SCC 4 (K.C. Sharma v. Delhi Stock Exchange). The relevant paragraphs from the High Court judgment provide:
"31. As would be noticed hereinafter, the history shows that various legislations had been enacted for safeguarding the interests of the investors and particularly small investors. Economy of the country, one way or the other, to a large extent would depend upon the dealings of the Stock Exchange.
"32. The concept that all public sector undertakings incorporated under the Indian Companies Act or Societies Registration Act for being State must be financed by the Central Government and under the deep and pervasive control thereof has undergone a sea change. The thrust, in our opinion, should be not upon the composition of the company but the duties and functions performed by it. Thus, whether the appellant is a body which exercises public function, is the primary question which should be raised and answered."
"40. But, in disputedly, in discharging its functions, the Delhi Stock Exchange has to deal with the public in general. It has some say as regards changing economic scenario of the country. Stock exchanges all over the country play a vital role in maintaining the vitality of the economy. Economic reforms of the country, particularly those in corporate sector, have a vital say in the development of economical physique of the country wherein formation of Stock Exchange and the role played by it assumes an important role."
"61. Having regard to the various decisions, we are of the opinion that the appellant satisfies the following conditions laid down by the apex court in Ramana Dayaram Shetty v. The International Airport Authority of India (supra):
(i) there is control over the management of the Corporation by the State;
(ii) the corporation enjoys state conferred or state protected monopoly status; and
(iii) the functions carried on by the corporation closely relate to the governmental functions inasmuch as
(a) that it is under deep rooted, all pervasive and extensive control of the Government through the Securities Exchange Board of India under the SEBI Act of 1992 and SCRA of 1956;
(b) it has a complete monopoly status within the specified territorial limits.
(c) It carries out important public/state functions that of completely controlling and regulating the transactions in securities in the country."
A similar view taken by the Bombay High Court which found the Bombay Stock Exchange to be amenable to the writ jurisdiction, reported at AIR 1991 Bom 30 (Sejal Rikeen Dalal v. The Stock Exchange, Bombay), has been placed by the petitioners.
An unreported Division Bench judgment of the Calcutta High Court in MAT No. 533 of 2002 and FMA No. 254 of 2002 (C. Mackertich Ltd. v. Custodian) delivered on July 19, 2002 is cited in the same context where the question as to whether the Calcutta Stock Exchange was amenable to the writ jurisdiction was left open. Another judgment reported at AIR 1997 Cal 18 (Overland Investment Ltd. v. State of Bengal) is placed by the petitioners to show that if an investment company could be found to be amenable to the writ jurisdiction because of the public element in the affairs of such company, any bank functioning under the Reserve Bank's ultimate control should also be seen in the same light. Paragraph 48 of the report is relevant:
"48. In the instant case it is not in dispute that these companies are dealing with public and the public money and they are working under the supervision and control of the Reserve Bank of India under a statutory order and that there is sufficient public element in the affairs of the companies and accordingly it cannot be said that these affairs of these companies are not amenable to writ."
The next judgment reported at (2003) 10 SCC 733 (Federal Bank Ltd. v. Sagar Thomas) that the petitioners have brought is also relied upon by the private bank. The key dramatis personae in these proceedings attempt to cling on to some of the sentences in the judgment in furtherance of their opposing contentions. The first respondent before the Supreme Court was the manager of a branch of the appellant bank who was suspended and later dismissed following a disciplinary inquiry. The manager challenged the order of dismissal in a petition under Article 226 of the Constitution. The bank's preliminary attempt to ward off the challenge was by citing its private status. The issue was answered against the bank at both stages in the High Court. In course of the Supreme Court allowing the appeal, it observed thus at paragraphs 32 and 33 of the report:
"32. Merely because Reserve Bank of India lays the banking policy in the interest of the banking system or in the interest of monetary stability or sound economic growth having due regard to the interests of the depositors etc. as provided under Section 5(c)(a) of the Banking Regulation Act does not mean that the private companies carrying on the business or commercial activity of banking, discharge any public function or public duty. These are all regulatory measures applicable to those carrying on commercial activity in banking and these companies are to act according to these provisions failing which certain consequences follow as indicated in the Act itself. As to the provision regarding acquisition of a banking company by the Government, it may be pointed out that any private property can be acquired by the Government in public interest. It is now a judicially accepted norm that private interest has to give way to the public interest. If a private property is acquired in public interest it does not mean that the party whose property is acquired is performing or discharging any function or duty of public character though it would be so for the acquiring authority.
"33. For the discussion held above, in our view, a private company carrying on banking business as a scheduled bank, cannot be termed as an institution or a company carrying on any statutory or public duty. A private body or a person may be amenable to writ jurisdiction only where it may become necessary to compel such body or association to enforce any statutory obligations or such obligations of public nature casting positive obligation upon it. We don't find such conditions are fulfilled in respect of a private company carrying on a commercial activity of banking. Merely regulatory provisions to ensure such activity carried on by private bodies work within a discipline, do not confer any such status upon the company nor put any such obligation upon it which may be enforced through issue of a writ under Article 226 of the Constitution. Present is a case of disciplinary action being taken against its employee by the appellant Bank. The respondent's service with the Bank stands terminated. The action of the Bank was challenged by the respondent by filing a writ petition under Article 226 of the Constitution of India. The respondent is not trying to enforce any statutory duty on the part of the Bank. That being the position, the appeal deserves to be allowed."
The petitioners submit that this is the only forum that they could have approached in respect of the matters complained of. An action in tort, according to them would not be an appropriate remedy. They rely on a passage from Salmond and Heuston on the Law of Torts (20th ed.) and a judgment reported at (2006) 13 SCC 706 (M.P. Mathur v. DTC) to say that a suit on the same cause of action would necessarily be founded on equity and leave them to the vagaries of the court's discretion. A passage from paragraph 14 in M.P. Mathur is placed:
"14. The present suit is based on equity. The term "equity" has four different meanings, according to the context in which it is used. Usually it means "an equitable interest in property". Sometimes, it means "a mere equity", which is a procedural right ancillary to some right of property, for example, an equitable right to have a conveyance rectified. Thirdly, it may mean "floating equity", a term which may be used to describe the interest of a beneficiary under a will. Fourthly, "the right to obtain an injunction or other equitable remedy". ..."
The petitioners claim that a suit would not be an appropriate remedy, particularly considering the repercussions of a finding of willful default under the master circular. They submit that even if a banker-customer relationship is presumed in the present case, the petitioners cannot claim that the bank owed any duty as a trustee to the petitioner company. For such principle, they rely on the judgment reported at (2008) 5 SCC 201 (KCC Software Limited v. Director of Income Tax (Investigation)).
The petitioners refer to an unreported judgment of the Madras High Court in WP Nos. 32502, 36764, 36782, 37150, 37197 and 37739/2003 and 1421, 8809 and 11180/2004 (V. Kannappan and 19 Ors. v. Additional Secretary, Ministry of Finance and Company Affairs,) delivered on November 26, 2008 where employees of Bank of Madura were allowed to maintain a petition under Article 226 of the Constitution against ICICI Bank Limited into which Bank of Madura had merged.
The bank here says that it owes no statutory duty to the petitioners. The bank contends that the fact that its affairs or functioning may be regulated by any authority would not make it amenable to the writ jurisdiction. The bank submits that there is a private contract between the bank and the petitioner company which governs the relationship between such parties; such contract is not statutory. There was no obligation on the part of the bank to enter into such contract. The bank claims that in its declaring the company to be a willful defaulter it discharged no statutory or public duty.
The bank refers to a decision rendered by a Single Judge of the Kerala High Court reported at (1988) 64 Comp Cas 399 (K.M. Sethumadhavan v. Dhanalakshmi Bank Ltd.) where it was held that a banking company having a private capital structure, and whose profits go to the private pockets of its shareholders and not to the public exchequer, would not be a state or authority within the meaning of Article 12 of the Constitution.
The bank says that for a petition under Article 226 of the Constitution to be maintained against a private body, it must be only for the purpose of securing the performance of a public duty. The bank argues that if the source of the power exercised in the impugned conduct is contractual then it has to be assessed as to whether any duty was cast on it by a statute or by public law since the remedy in this jurisdiction is only in public law.
A judgment reported at (2005) 6 SCC 657 (Binny Ltd. v. V. Sadasivan) is placed by the bank to bring clarity on the issue. Two sets of proceedings were considered in that judgment. The respondents in the lead matter instituted a petition under Article 226 of the Constitution for a declaration that a particular clause of a contract of service was void and the termination based thereon was illegal. The writ petitioners in that matter contended that the agreements with the appellant before the Supreme Court were in violation of Article 21 of the Constitution and the closure of the mill was in derogation of Sections 25F and 25N of the Industrial Disputes Act, 1947. They sought their reinstatement with continuity of service and consequential benefits. The company raised a question of maintainability of the writ petition. In the second matter also decided by such judgment the appellant was employed as a corporate legal manager of a private limited company engaged in the manufacture of chemicals. Such appellant's services were terminated and he invoked the writ jurisdiction for quashing the order of termination and sought a mandamus for the company to restore his employment in the same grade and pay scale to which he was entitled at the time of termination. The company questioned the maintainability of the proceedings. The important issue reached a Full Bench of the Bombay High Court that held that the writ petition was not maintainable. Paragraphs 11 and 29 of the report enunciate the applicable principles:
"11. Judicial review is designed to prevent the cases of abuse of power and neglect of duty by public authorities. However, under our Constitution, Article 226 is couched in such a way that a writ of mandamus could be issued even against a private authority. However, such private authority must be discharging a public function and the decision sought to be corrected or enforced must be in discharge of a public function. The role of the State expanded enormously and attempts have been made to create various agencies to perform the governmental functions. Several corporations and companies have also been formed by the Government to run industries and to carry on trading activities. These have come to be known as public sector undertakings. However, in the interpretation given to Article 12 of the Constitution, this Court took the view that many of these companies and corporations could come within the sweep of Article 12 of the Constitution. At the same time, there are private bodies also which may be discharging public functions. It is difficult to draw a line between public functions and private functions when they are being discharged by a purely private authority. A body is performing a "public function" when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. In a book on Judicial Review of Administrative Action (5th Edn.) by de Smith, Woolf & Jowell in Chapter 3, para 0.24, it is stated thus:
"A body is performing a 'public function' when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. This may happen in a wide variety of ways. For instance, a body is performing a public function when it provides 'public goods' or other collective services, such as health care, education and personal social services, from funds raised by taxation. A body may perform public functions in the form of adjudicatory services (such as those of the criminal and civil courts and tribunal system). They also do so if they regulate commercial and professional activities to ensure compliance with proper standards. For all these purposes, a range of legal and administrative techniques may be deployed, including rule making, adjudication (and other forms of dispute resolution); inspection; and licensing.
Public functions need not be the exclusive domain of the State. Charities, self-regulatory organisations and other nominally private institutions (such as universities, the Stock Exchange, Lloyd's of London, churches) may in reality also perform some types of public function. As Sir John Donaldson, M.R. urged, it is important for the courts to 'recognise the realities of executive power' and not allow 'their vision to be clouded by the subtlety and sometimes complexity of the way in which it can be exerted'. Non-governmental bodies such as these are just as capable of abusing their powers as is Government."
"29. Thus, it can be seen that a writ of mandamus or the remedy under Article 226 is pre-eminently a public law remedy and is not generally available as a remedy against private wrongs. It is used for enforcement of various rights of the public or to compel public/statutory authorities to discharge their duties and to act within their bounds. It may be used to do justice when there is wrongful exercise of power or a refusal to perform duties. This writ is admirably equipped to serve as a judicial control over administrative actions. This writ could also be issued against any private body or person, specially in view of the words used in Article 226 of the Constitution. However, the scope of mandamus is limited to enforcement of public duty. The scope of mandamus is determined by the nature of the duty to be enforced, rather than the identity of the authority against whom it is sought. If the private body is discharging a public function and the denial of any right is in connection with the public duty imposed on such body, the public law remedy can be enforced. The duty cast on the public body may be either statutory or otherwise and the source of such power is immaterial, but, nevertheless, there must be the public law element in such action. Sometimes, it is difficult to distinguish between public law and private law remedies. According to Halsbury's Laws of England, 3rd Edn., Vol. 30, p. 682, "1317. A public authority is a body, not necessarily a county council, municipal corporation or other local authority, which has public or statutory duties to perform and which perform those duties and carries out its transactions for the benefit of the public and not for private profit."
There cannot be any general definition of public authority or public action. The facts of each case decide the point."
The bank says that the source of the power exercised by its grievance redressal committee is the contract between the parties and the banker-customer relationship that such contract brought in. It claims that the Federal Bank judgment would demonstrate that a private bank was per se not be amenable to the writ jurisdiction.
The next decision cited is reported at (2006) 4 MLJ 385 (Nadar Mahajana Sangam v. Reserve Bank of India). A society instituted a writ petition complaining primarily against a scheduled bank incorporated under the Companies Act. The society alleged that its members were beneficially interested in certain shares of the bank which the bank and its directors had attempted to transfer to third parties in violation of the guidelines issued by the Reserve Bank. The relevant discussion is found in paragraphs 6 and 10 of the report:
"6. In this case, the appellant, herein alleged that the first respondent, having refused to acknowledge transfer of the shares, the second respondent cannot be permitted to effect the transfer. In the normal functioning of the private banking company there is no participation or interference of the State or its authorities. The statutes have been framed regulating the financial and commercial activities so that the fiscal equilibrium may be kept maintained and not get disturbed by the malfunctioning of such companies or institutions involved in the business of banking. These are all regulatory measures for the purpose of maintaining healthy economic atmosphere in the Country. Such regulatory measures are provided for other companies also as well as industries manufacturing goods of importance. Otherwise, these are purely private commercial activities. It hardly makes any difference that such supervisory vigilance is kept by the Reserve Bank of India under a statute of the Central Government. Even if it was with the Central Government in place of the Reserve Bank of India it would not have made any difference. It is only in case of malfunctioning of the company that occasion to exercise such powers arises to protect the interests of the depositors, shareholders or the company itself or to help the company to be out of the woods. In the times of normal functioning, such occasions do not arise except for routine inspections, etc., with a view to see that things are moved smoothly in keeping with fiscal policies in general. Besides taking care of such interest, as mentioned above, there is no other interest of the State to control the affairs and management of the private companies. Such private companies would normally not be amenable to the writ jurisdiction under Article 226 of the Constitution."
"10. The writ petition filed by the appellant cannot have any personal grievance in the matter and at best, only its members can have any grievance. It is well settled that ordinarily a writ petition can only be filed by someone who is personally aggrieved. The powers under Article 226 of the Constitution of India should be sparingly used and only in those clear cases where the rights of a person have been seriously infringed and he has no other adequate and specific remedy available to him. The relief under Article 226 of the Constitution of India is based on the existence of a right in favour of a person invoking the writ jurisdiction. The exception to the general rule is only in cases where the writ applied for is writ of habeas corpus or quo warranto or filed in public interest. Even assuming the members of the appellant's Association is affected by an act of the second respondent, but for the purpose of enforcing the rights of the members, writ petition at the instance of the Association is not maintainable. Ordinarily, the personal or individual right of the petitioner himself be enforced under Article 226 of the Constitution of India. Merely because the first respondent/Reserve Bank of India has been arrayed as a party, the Court does not get jurisdiction to hear the writ petition since the main writ petition is against the second respondent, which is a private Bank."
A Full Bench decision of the Jammu and Kashmir High Court reported at 2006 (2) JKLJ 146 (Firdous Ahmad Tanki v. J and K Bank Ltd. and State of J and K) is next cited by Kotak Mahindra Bank where the reference before the Full Bench was as to whether the Jammu and Kashmir Bank Limited was a state or authority within the meaning of Article 12 of the Constitution and amenable to the writ jurisdiction. The Full Bench held that despite the regulatory provisions exercised by the Reserve Bank over any scheduled or other bank, it would not imply that every bank would be amenable to this jurisdiction. Paragraphs 61, 65 and 68 of the report have been relied on:
"61. Application of various laws including the Companies Act 1956; the Banking Regulations Act 1949 and Reserve Bank of India Act 1954 and other statutes may be applicable are only regulatory provisions to regulate the functioning of the Bank to secure and safeguard the financial interests of its customers and persons who deal with the Bank. All these regulatory provisions have been enacted in public interest. However, these regulatory provisions do not clothe the Bank with the status of an authority nor does it enjoin upon it a public duty or public function while carrying on its banking/business activities including dealing with its employees. We are saying so in the context of any private individual dealing with public. Let us take the case of an individual who deals with grocery or eatables. Such an individual deals with public at large and is also subjected to various laws like registration under the Shops and Establishment Act wherein he is under an obligation not only to get his establishment register with competent authority but also to disclose his status as that of an individual, partnership or a company; member of employees employed by him, working hours of the establishment, nature of business being carried on etc. etc. An eatery is also required to obtain a licence under the Food Adulteration Act from the Municipal Corporation and to keep the eatables fit for human consumption. All these statutory provisions are regulatory in nature and have been enacted in public interest. Violation of any of the statutory provisions also make the individual liable for punishment under law. The fact that an individual dealing with public is under various statutory obligations to perform certain functions and the obligations does not make his functions a public duty or public functions and subject him to the power of judicial review of the High Court under Article 226. He is purely a private person carrying on business activities for personal gain, without any public duty, though there may be public element in his/its functions or activities."
"65. We may also notice herein that the above observations do not mean that in no circumstance this Court can exercise the power of judicial review against the Bank. A distinction has to be drawn between failure to observe the statutory duty and an obligation (s) towards its employees and individuals which are non-statutory in nature."
"68. For our conclusions hereinabove we answer the reference by holding:
(a) The Jammu and Kashmir Bank Ltd is neither the State nor an authority or instrumentality of the State within the meaning of Article 12 of the Constitution of India;
(b) The Bank does not perform any public duty or public functions while dealing with its employees or carrying out its normal commercial and business activities as a Banking Company so as to make it amenable to writ jurisdiction under Article 226 of the Constitution of India read with Section 103 of the Constitution of Jammu and Kashmir."
The bank refers to (1963) 2 SCR 297 (Shanti Prasad Jain v. Director of Enforcement, FERA) and AIR 1968 Cal 371 (Major General Mahabir Shum Sher Jung Bahadur Rana v. Lloyds Bank Ltd.) for the principle that the relationship between a banker and its customer is one of debtor and creditor and not of trustee and beneficiary. The bank argues that if such is the relationship, there can be no element of public duty and it would be purely in the realm of private law. The bank insists that its impugned decision emanates from the contract with the petitioner company and refers to the more substantial disputes between it and the company that are already pending before the City Civil Court and in the arbitration reference.
On the aspect of maintainability, the Reserve Bank has referred to a passage from Judicial Remedies in Public Law by Clive Lewis (3rd Ed.) where the author has commented on the view taken by the Court of Appeal in England that the decisions of bodies who acquire jurisdiction over individuals by contract are excluded from the ambit of judicial review. The author has discussed the Aga Khan case reported at (1993) 1 WLR 909 (Regina v. Disciplinary Committee of the Jockey Club, Ex parte Aga Khan), which the Reserve Bank cites.
The Jockey Club, which was incorporated by a Royal Charter, regulated horse racing in Britain and all race meetings had to be licensed by such club and run under its rules. An owner wishing to race horses was required to register with the club and enter into a contractual relationship by which he expressly submitted to the rules of the club and acknowledged that he was governed by the disciplinary powers of the club. The applicant was a foremost racehorse owner and breeder. In 1989 one of his fillies won a major race and a sample of her urine was said to contain camphor which was prohibited by the rules. At a subsequent inquiry the club's disciplinary committee concluded that such substance was present in her urine and, in consequence, disqualified the filly and fined her trainer. The applicant sought leave for judicial review by way of an order of certiorari to quash the committee's decision. A preliminary issue was raised as to whether the decision was amenable to judicial review. The question was determined against the applicant and such determination carried to the Court of Appeal, where the order of the Divisional Court was affirmed. The following passage reveals the relevant considerations:
"I have little hesitation in accepting the applicant's contention that the Jockey Club effectively regulates a significant national activity, exercising powers which affect the public and are exercised in the interest of the public. I am willing to accept that if the Jockey Club did not regulate this activity the government would probably be driven to create a public body to do so.
"But the Jockey Club is not in its origin, its history, its constitution or (least of all) its membership a public body. While the grant of a Royal Charter was no doubt a mark of official approval, this did not in any way alter its essential nature, functions or standing. Statute provides for its representation on the Horserace Betting Levy Board, no doubt as a body with an obvious interest in racing, but it has otherwise escaped mention in the statute book. It has not been woven into any system of governmental control of horseracing, perhaps because it has itself controlled horseracing so successfully that there has been no need for any such governmental system and such does not therefore exist. This has the result that while the Jockey Club's powers may be described as, in many ways, public they are in no sense governmental. ...
"I would accept that those who agree to be bound by the Rules of Racing have no effective alternative to doing so if they want to take part in racing in this country. It also seems likely to me that if, instead of Rules of Racing administered by the Jockey Club, there were a statutory code administered by a public body, the rights and obligations conferred and imposed by the code would probably approximate to those conferred and imposed by the Rules of Racing. But this does not, as it seems to me, alter the fact, however anomalous it may be, that the powers which the Jockey Club exercises over those who (like the applicant) agree to be bound by the Rules of Racing derive from the agreement of the parties and give rise to private rights on which effective action for a declaration, an injunction and damages can be based without resort to judicial review. It would in my opinion be contrary to sound and long-standing principle to extend the remedy of judicial review to such a case."
The petitioners have relied on the Court of Appeal's recognition of judicial review of orders passed by the panel on takeovers and mergers which was a self- regulating unincorporated association in England. The judgment reported at (1987) 1 All ER 564 (R v. Panel on Take-overs and Mergers), which has been quoted with approval in (1993) 1 SCC 645 (Unnikrishnan, JP v. State of A.P.), is placed and the following passages read out:
"The principal issue in this appeal, and the only issue which may matter in the longer term, is whether this remarkable body is above the law. Its respectability is beyond question. So is its bona fides. I do not doubt for one moment that it is intended to and does operate in the public interest and that the enormously wide discretion which it arrogates to itself is necessary if it is to function efficiently and effectively. While not wishing to become involved in the political controversy on the relative merits of self- regulation and governmental or statutory regulation, I am content to assume for the purposes of this appeal that self-regulation is preferable in the public interest. But that said, what is to happen if the panel goes off the rails? Suppose, perish the thought, that it were to use its powers in a way in which was manifestly unfair. What then? Counsel for the panel submits that the panel would lose the support of public opinion in the financial markets and would be unable to continue to operate. Further or alternatively, Parliament could and would intervene. Maybe, but how long would that take and who in the meantime could or would come to the assistance of those who were being oppressed by such conduct?" (Page
568) "In fact, given its novelty, the panel fits surprisingly well into the format which this court had in mind in R v. Criminal Injuries Compensation Board. It is without doubt performing a public duty and an important one.
This is clear from the expressed willingness of the Secretary of State for Trade and Industry to limit legislation in the field of take-overs and mergers and to use the panel as the centrepiece of his regulation of that market. The rights of citizens are indirectly affected by its decisions, some, but by no means all of whom, may in a technical sense be said to have assented to this situation, eg the members of the Stock Exchange. At least in its determination of whether there has been a breach of the code, it has a duty to act judicially and it asserts that its raison d'être is to do equity between one shareholder and another. Its source of power is only partly based on moral persuasion and the assent of institutions and their members, the bottom line being the statutory powers exercised by the Department of Trade and Industry and the Bank of England. In this context I should be very disappointed if the courts could not recognise the realities of executive power and allowed their vision to be clouded by the subtlety and sometimes complexity of the way in which it can be exerted." (Page 577) The petitioners have relied on Sir William Wade on Administrative Law (9th Ed.) for the author's endorsement of the more wholesome principle of judicial review in Scotland. There is a reference, while discussing the boundaries of judicial review and the realms beyond the law, that the English view epitomised in the Aga Khan case that the source of the authority was "in no sense governmental" but derived from contract, would constrain the scope of judicial review. The following passage from page 646 captures the spirit which the petitioners adventurously commend to be adopted:
"In Scots law, by contrast, the distinction between public and private law is rejected and the supervisory jurisdiction of the Court of Session is available wherever a decision-making power is conferred on some body, whether by statute or private contract or some other instrument, and that body exceeds or abuses its power or fails in its duty. The court may intervene if any such body violates its own constitution or rules or errs in law or infringes natural justice, even if it is the governing body of a private association. Judicial review may extend to the decisions of religious and sporting bodies if they act irregularly, oppressively or unfairly. Justice can thus be done in cases which lie beyond the reach of the rigid English system with its misguided public and private law dichotomy, and procedural obstacles and dilemmas are avoided."
On a reading of the authorities it appears that a petition under Article 226 of the Constitution would be maintainable either by virtue of the status of the person or authority complained against; or by virtue of the nature of its general functions or the character of the specific act impugned. The word "maintainability" is loosely used though it has several hues to it; it is used in cases where the action may not be received at all without any application of mind or may initially be received and dismissed at the preliminary stage. It is also used, and probably erroneously, in the context of alternative remedy, but that is a separate discussion altogether. In every case, however, where the issue of maintainability of a writ petition is raised, the key is ultimately found in the nature of the grievance and the legal right canvassed.
A writ petition has per force to be allowed to be filed if one of the respondents thereto is obviously a state or authority within the meaning of Article 12 of the Constitution. Yet, such petition may not progress at all if the nature of the right sought to be asserted takes it beyond the pale of judicial review. For a writ petition to be entertained there has to be an element of public law involved. This could be by virtue of the status of the respondent complained against or the nature of the conduct impugned. The test of whether a body performs a public function may not always depend on the source of its general operations or whether it is a public body or a private body. Judicial review can be sought for activities of any body performing public functions or discharging or seeking to discharge a public duty by the act complained of. Just as all decisions of public bodies would not be subject to judicial review, the fact that it is the conduct of a private body that is assailed in this jurisdiction will not ipso facto disqualify the action. A body generally performing a public function may escape the scanner under judicial review if it can cite some other branch of law more appropriately suited for resolution of the issue or if the act complained of falls squarely within the private, non-statutory contract between the parties.
At the heart of the petitioners' grievance in this case is the invocation of the master circular. There is an element of public interest in the introduction of the circular by the Reserve Bank. The master circular announces that it had been necessitated pursuant to the instructions of the Central Vigilance Commission for collection of information on willful defaults of Rs.25 lakh and above by the Reserve Bank and dissemination thereof to reporting banks and financial institutions. There is a huge public element about the circular in that the access of a willful defaulter to public funds would be seriously impaired upon the person being branded as such. It is a warning to all banks and financial institutions to be wary of such person. The underlying spirit of the circular is to ensure the constriction of the flow of public funds to a willful defaulter. If such is the purpose of the circular, which is for the benefit of banks and financial institutions dealing in public funds - irrespective of whether they deal with state funds - the very act of invocation of the circular would involve a public element notwithstanding the person invoking it not being amenable to the writ jurisdiction by the nature of its constitution. The fundamental grievance in the present case is the erroneous exercise of a duty which has been imposed in public interest.
The regulatory authority of the Reserve Bank over Kotak Mahindra Bank would not make, as the several authorities show, the bank amenable to judicial review. The deep and pervasive control of the State, which is generally a guiding factor to assess whether a respondent would be amenable to this jurisdiction, would not imply the mere regulatory or supervisory control of a statutory authority over the body which is sought to be subjected to judicial review. A partnership firm has to conform to the Partnership Act, a society has to act in accordance with the applicable statute, a company has to comply with the provisions of the Companies Act and, similarly, any bank has to abide by the Banking Regulation Act and the supervision of the central bank under the Reserve Bank of India Act. If, however, the extent of regulatory control by a statutory body over a private body is coupled with a public duty in its general functioning or the private body is a specialised body dealing with the public, as a stock exchange, the consideration would be different.
The remedy under Article 226 is essentially a public law remedy and is not ordinarily available against private wrongs. The jurisdiction may be invoked when there is wrongful exercise of power or a refusal to perform duties in the public law domain. Article 226 of the Constitution confers on every High Court, subject to territorial considerations, the "power ... to issue to any person or authority, including in appropriate cases, any Government ... directions, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, or any of them, for the enforcement of any of the rights conferred by Part III and for any other purpose." It is a constitutional mandate for judicial control over administrative actions. In view of the words used in Article 226 of the Constitution, the jurisdiction may also be invoked against any private body or person. However, the scope of the authority is limited to the enforcement of a public duty. A question as to the applicability of the jurisdiction is determined by the nature of the duty to be enforced, rather than the identity or general status of the person against whom a writ is sought. If a private body discharges a public function and the denial of any right is in connection with the public duty imposed on such private body, the public law remedy under Article 226 may be enforced. The duty cast on the person complained against may be either statutory or otherwise and the source of such power is immaterial as long as there is a public law element in the impugned action.
The master circular contemplates a public function as it seeks to achieve some collective benefit in the economic sphere. It has been introduced in public interest. Viewed from Kotak Mahindra Bank's perspective, the invocation of the master circular does not give it any benefit. In fact, the circular is not intended to confer any advantage on the body resorting to it to identify a willful defaulter; unless it is in the negative sense of being used as a sword for the alleged defaulter to fall in line and make payment before being publicly (albeit within the extended banking circle) branded as a willful defaulter. If the bank's case is accepted then it would be that the company has failed to discharge an irrefutable debt to the bank. The invocation of the master circular or the declaration of the company as a willful defaulter thereunder will not - again, except in the negative sense of its coercive impact - bring in the payment that the Bank claims to be its due. The effect of the master circular, therefore, is not for the private benefit of the body invoking it, but for the larger public benefit of others in the banking or financial sector. The master circular begins on the premise that there is an undisputable debt due (never mind, in this context, the source of the debt) and the consideration thereunder is only as to whether the default in payment thereof is willful within the definition of the relevant expression in the circular. The adjudication and, more importantly, the outcome of the adjudication under the master circular are intended to achieve a larger benefit than the immediate, private interest of the body which invokes it.
The petition thus qualifies to progress for further consideration, not upon Kotak Mahindra Bank being found to be a state or other authority generally answering to that description in Article 12 of the Constitution, or on it being assessed to be inherently engaged in discharging public functions, but on the public character of the duty that is intrinsic in its invocation of the master circular. The exercise of such public duty brings in the attendant safeguards under Part III of the Constitution and its conduct in discharge of such duty has to be tested against the elevated, more exacting standards than would otherwise be applicable to this private bank.
There are two other, but less fundamental, preliminary hurdles that the petitioners have been presented by the respondents. Both respondent banks state that there is a statutory arbitration provided for in the Credit Information Companies (Regulation) Act, 2005 that would cover the grievances sought to be raised by the petitioners. They say since that Act has been introduced to provide for regulation of credit information companies and to facilitate efficient distribution of credit and for matters connected therewith, the petitioner company should seek its remedy under Section 18 thereof:
"18. Settlement of dispute.--(1) Notwithstanding anything contained in any law for the time being in force, if any dispute arises amongst, credit information companies, credit institutions, borrowers and clients on matters relating to business of credit information and for which no remedy has been provided under this Act, such disputes shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996 (26 of 1996), as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and provisions of that Act shall apply accordingly.
(2) Where a dispute has been referred to arbitration under sub-section (1), the same shall be settled or decided,--
(a) by the arbitrator to be appointed by the Reserve Bank;
(b) within three months of making a reference by the parties to the dispute :
Provided that the arbitrator may, after recording the reasons therefor, extend the said period up to a maximum period of six months:
Provided further that, in an appropriate case or cases, the Reserve Bank may, if it considers necessary to do so (reasons to be recorded in writing), direct the parties to the dispute to appoint an arbitrator in accordance with the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996), for settlement of their dispute in accordance with the provisions of that Act.
(3) Save as otherwise provided under this Act, the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to all arbitration under this Act as if the proceedings for arbitration were referred for settlement or decision under the provisions of the Arbitration and Conciliation Act, 1996."
The bank says that a statutory arbitration stands on a higher pedestal than an arbitration clause contained in a contract. It argues that Section 18(1) of the 2005 Act is couched in the widest terms and would take within its fold a dispute of the nature that the petitioner company has brought to court. The bank suggests that since the subject involves an element of expertise, the court should treat the objection with a bit more circumspection than the everyday protest on the ground of alternative remedy. The bank says that at the end of the day an objection on the ground of an efficacious alternative remedy is an appeal to the court to exercise its discretion to not receive the petition. The bank is cautious in putting the point across; it says that its prayer to refer the matter to an expert forum under the statutory clause is not to imply the court's inability to address the issues involved but only to emphasise the inconvenience that may be occasioned in ascertaining the banking practice and then assessing the matters in issue.
The Reserve Bank is more vehement on this aspect. It commends the alternative remedy of statutory arbitration vociferously by underlining the virtues of the self-imposed restraint in this jurisdiction to not take up a matter if an effective option is available to the petitioner before a designated forum. The Reserve Bank asserts that since credit information is defined in the 2005 Act to mean, inter alia, the creditworthiness of any borrower of a credit institution under Section 2(d)(iv) thereof and the private bank is undoubtedly a credit institution within the meaning of the expression used in the said Act and the company a borrower thereunder, a dispute between the bank and the company regarding the creditworthiness of the company would fall within the wide amplitude of Section 18 of the Act. It argues that clause 2.9 of the master circular obliges a bank to "submit the list of suit-filed accounts of wilful defaulters of Rs.25 lakh and above as at end-March, June, September and December every year to Credit Information Bureau (India) Ltd" which has been established under the 2005 Act. The Reserve Bank refers to clause 5.1 of the master circular that envisages dissemination of information relating to willful defaulters both by the Reserve Bank and by the bureau set up by the 2005 Act with particulars of the directors of the defaulting companies and related details. The central bank is at pains to demonstrate that the adjudication of a willful defaulter by a bank or a financial institution is an exercise effectively under the 2005 Act and the statutory remedy thereunder may be exhausted before this extraordinary jurisdiction is invoked.
The Reserve Bank relies on a judgment reported at (1976) 2 SCC 167 (Bisra Stone Lime Co. Ltd. v. Orissa State Electricity Board) and places paragraph 24 of the report:
"24. It is then submitted that this Court should not use its discretion in favour of arbitration in a matter where it is a pure question of law as to the power of the Board to levy a surcharge. This submission would have great force if the sole question involved were the scope and ambit of the power of the Board under Sections 49 and 59 of the Act to levy a surcharge, as it was sought to be initially argued. The question in that event may not have been within the content of clause 23 of the agreement. But all questions of law, one of which may be interpretation of the agreement, need not necessarily be withdrawn from the domestic forum because the court has discretion under Section 34 of the Arbitration Act or under Article 226 of the Constitution and that the court is better posted to decided such questions. The arbitration clause 23 is a clause of wide amplitude taking in its sweep even interpretation of the agreement and necessarily, therefore, of clause 13 therein. We are therefore, unable to accede to the submission that we should exercise our discretion to withhold the matter from arbitration and deal with it ourselves."
The Reserve Bank also cites in such context a judgment reported at (2007) 14 SCC 680 (Empire Jute Company Limited v. Jute Corporation of India Ltd.) where the Bisra Stone Lime case was noticed and the Supreme Court exhorted that the existence of an arbitration should deter the writ court from proceeding with the matter. But it would be evident from paragraph 18 of the report that the impugned order of a Division Bench of this court had referred a part of the subject-matter of the writ petition to arbitration and retained the other part in court:
"18. The power of judicial review vested in the superior courts undoubtedly has wide amplitude but the same should not be exercised when there exists an arbitration clause. The Division Bench of the High Court took recourse to the arbitration agreement in regard to one part of the dispute but proceeded to determine the other part itself. It could have refused to exercise its jurisdiction leaving the parties to avail their own remedies under the agreement but if it was of the opinion that the dispute between the parties being covered by the arbitration clause should be referred to arbitration, it should not have proceeded to determine a part of the dispute itself."
Ordinarily the court, in its wisdom, imposes a restraint on its exercise of jurisdiction under Article 226 where the party invoking the jurisdiction has an effective and adequate alternative remedy. Such restraint is founded on convenience and discretion rather than any regimen of law. The existence of an alternative remedy does not oust the jurisdiction of the court. In a matter where the order complained against is alleged to be illegal or invalid as being contrary to law, a petition at the instance of person adversely affected by it should usually not be rejected on the ground of an alternative remedy since the other remedy available may not be appropriate.
There appears to be a fallacy in how an arbitration agreement is cited before court to dissuade it to entertain a writ petition on merits. In principle, citing an arbitration clause in a contract between the key players in any writ proceedings should not be any more exalted than an argument that the petitioner should be asked to assert his claim before a regular forum rather than be entertained in this extraordinary jurisdiction. After all, for every civil dispute brought to the writ court there is almost invariably an alternative remedy; if nothing else, at least by way of a civil suit. Subject to the arbitrability of the cause, an arbitration agreement merely takes the adjudication away from the regular forum ordained by law to a consensual forum. In substance it should ordinarily make no difference to the writ court as to whether the disputes before it are covered by an arbitration agreement to which the petitioner is a party. For, if the court finds that the grievance canvassed relates to contract qua contract or involves arduous disputes on facts, the court would, in any event, not allow the matter to continue in this extraordinary jurisdiction. In such a case the arbitration agreement covering the disputes would be pertinent for the order of dismissal of the petition; the writ court would not relegate the petitioner to a suit or the usual remedy recognised by law but direct it go to the forum agreed to under the relevant agreement.
The consideration would, however, be weighed more heavily against the petitioner if a statutory arbitration or an arbitration before an expert body (not of arbitrators but of specialists in the area of activity involved in the engagement between the main parties) is cited to persuade the exercise of the self-imposed restraint to not receive the petition. But such distinction - between a run of the mill arbitration agreement and a statutory arbitration or an arbitration before an expert body - is no different from the court exercising greater restraint (where there is no arbitration agreement covering the subject-matter) in receiving a writ petition when there is a designated forum under, say, a special statute or an appellate forum available than when there is no appellate or other special forum nominated.
In this case a statutory arbitration is alluded to. The question is whether such alternative remedy would be efficacious if it is at all available. Despite the Reserve Bank's enthusiasm in the reference, there is a conundrum that it has missed. The primary ground urged is that the expression, "credit information", under the 2005 Act would embrace the act of the bank here adjudging the petitioner company to be a willful defaulter. But that would imply that the company is a borrower qua the bank. If it were so held then the major plank of the company's substantive challenge is robbed and there may not be any need for the reference at all. It is true that under the Arbitration and Conciliation Act, 1996, which would apply to a reference under Section 18 of the 2005 Act, the arbitral tribunal should be left to adjudicate upon its jurisdiction. But it would appear rather odd to ask the company to make a reference under Section 18 of the 2005 Act only to assert before the arbitral tribunal that the company was not a borrower qua the bank, when the existence of such fact is the foundation of the arbitral tribunal's authority to receive the reference. It is the same jurisdictional fact that the company has made the basis of its present challenge that would be a prerequisite for the arbitral tribunal to assume jurisdiction under Section 18 of the 2005 Act.
The alternative remedy canvassed would not be efficacious since the arbitral tribunal would not have the authority to receive the challenge to the vires of the master circular that the petitioners have brought here. But merely because the petitioners have questioned the legality of the master circular would not by itself take the matter out of the arbitral tribunal's domain if such tribunal would otherwise have had authority to receive the subject-matter of the petition. Oftentimes dexterous drafting would bring about the illusion of a right when none may exist; or, the delusion of the necessity of a party impleaded unnecessarily; or, the chimera of a plausible challenge to any provision when there is no likelihood of its success. Many judicial hours have been expended in appraising how the discretion under Section 34 of the old Arbitration Act, 1940 was to be exercised when an odd party or an extraneous cause of action was introduced in a plaint to dodge a reference to arbitration. The quality of the challenge to the validity of the master circular has to be assessed; not to the entire hilt but only to probe whether such challenge is a ruse to avoid the arbitral tribunal. There are two facets to the petitioners' assault on the master circular:
that it is bad per se for all comers; and, that if the dealings between the company and the bank - whether or not it is a derivative transaction - were to be included in its fold, it would be arbitrary and rendered ultra vires the Constitution. There is an arguable case made out, though it may still fail in the final reckoning. But since the respondents argue that the challenge to the validity of the master circular should not be entertained on the ground of constructive res judicata, the prima facie satisfaction of the quality of the challenge cannot yet be the conclusive basis for repelling the argument on alternative remedy.
There is a further reason for discarding the respondents' protest on the ground of alternative remedy, which is generally an inappropriate consideration at a final hearing but is a live issue in this case as the respondents' right to urge the same had been preserved by the order receiving the petition. The petitioners have contended that the grievance redressal committee of the bank inherently lacked jurisdiction to take upon the burden of assessing whether the company was a willful defaulter under the master circular. It is now settled that if an arguable case is brought where the challenge goes to the root of the matter then it is better suited to subject it to judicial review than push it to the alternative or agreed forum. The petition here is founded on such a fundamental question as the propriety of the assumption of authority under the master circular that it touches a core concern of public importance.
On the final preliminary issue the respondents contend that the previous petition and the order of March 27, 2009 thereon would bar the present petition altogether or, at least, the petitioners' right to assail the validity of the master circular stands forfeited. The bank says that the company ought to have questioned the legality of the master circular immediately upon receipt of the bank's show-cause notice issued thereunder and in the company not so doing and even omitting to question it in the earlier round, the lead prayer in this petition should not have been made and cannot be take up:
"(a) The provisions of Paragraph 3 of the Master Circular dated July 1, 2008 be declared to be unconstitutional, illegal and void and the same be struck down by an appropriate writ, order or direction;"
The bank relies on a judgment reported at (1965) 1 SCR 686 (Devilal Modi v. Sales Tax Officer, Ratlam) where a Constitution Bench considered whether the principle of constructive res judicata could be applied to a writ petition. The appellant before the Supreme Court assailed a final order of sales tax assessment before the High Court. The writ petition failed and he was unsuccessful in the appeal by special leave before the Supreme Court. The assessee attempted to raise some additional grounds before the Supreme Court which recorded such additional grounds but did not allow the assessee to urge them as they were not specified in his writ petition. He then went back before the High Court and filed another petition where he took the additional grounds that were not specifically taken in the previous petition. The High Court dismissed the second petition on merits and in the resultant appeal by special leave, the question of constructive res judicata arose. The Supreme Court noticed an earlier Constitution Bench judgment in Amalgamated Coalfields Ltd v. Janapada Sabha, Chhindwara (AIR 1961 SC 964) and held that the ratio therein was inapplicable to the case before the subsequent Constitution Bench.
At the time that the appeal in Amalgamated Coalfields Ltd. was argued before the Supreme Court, some new points of law were sought to be raised but the Supreme Court did not allow them to be made on the ground that they ought to have been urged at an earlier stage. When a similar order was passed against the said company for a subsequent year, the said additional points were included by it in its petition before the High Court. The High Court held that it was not open to the Company to raise such points on the ground of constructive res judicata. The company took such order to the Supreme Court in appeal by special leave. The Supreme Court held that the High Court was in error in holding that the principle of constructive res judicata precluded the Company from raising the additional points. Accordingly, the merits of the said points were considered and the challenge to the impugned assessment order was upheld. In dealing with the question of constructive res judicata, the earlier Constitution Bench in Amalgamated Coalfields Ltd. observed that constructive res judicata was an artificial form of res judicata enacted by Section 11 of the Code of Civil Procedure and it should not be generally applied to writ petitions filed under Article 32 or Article 226. In the later decision of Devilal Modi it was observed that the enunciation of the principle in Amalgamated Coalfields Ltd. had to be read in proper perspective since the "Court also pointed out that the appeal before the Court was in relation to an assessment levied for a different year, and that made the doctrine of res judicata itself inapplicable."
The Supreme Court held in Devilal Modi that it would not be right to ignore the principles of res judicata altogether in dealing with writ petitions filed by citizens alleging the contravention of their fundamental rights and that considerations of public policy could not be ignored in such cases. The substance of the legal principle is captured in the following words of paragraph 11 and in paragraph 12 of the report:
"11. ... the basic doctrine that judgments pronounced by this Court are binding and must be regarded as final between the parties in respect of matters covered by them, must receive due consideration.
"12. The result of the decision of this Court in the earlier appeal brought by the appellant before it is clear and unambiguous, and that is that the appellant had failed to challenge the validity of the impugned order which had been passed by the Assistant Commissioner against him. In other words, the effect of the earlier decision of this Court is that the appellant is liable to pay the tax and penalty imposed on him by the impugned order. It would, we think, be unreasonable to suggest that after this judgment was pronounced by this Court, it should still be open to the appellant to file a subsequent writ petition before the Madhya Pradesh High Court and urge that the said impugned order was invalid for some additional grounds. In case the Madhya Pradesh High Court had upheld these contentions and had given effect to its decision, its order would have been plainly inconsistent with the earlier decision of this Court, and that would be inconsistent with the finality which must attach to the decisions of this Court as between the Parties before it in respect of the subject-matter directly covered by the said decision. Considerations of public policy and the principle of the finality of judgments are important constituents of the rule of law and they cannot be allowed to be violated just because a citizen contends that his fundamental rights have been contravened by an impugned order and wants liberty to agitate the question about its validity by filing one writ petition after another."
The bank relies on another judgment reported at (2005) 1 SCC 444 (U.P. State Road Transport Corporation v. State of U.P.) for the proposition that the applicability of the doctrine of constructive res judicata had been extended to statutory violations challenged by way of proceedings under Article 226 of the Constitution. The complex facts in that case need to be seen for the law laid down therein to be best appreciated.
By an order made in Shri Chand v. Govt. of U.P. [(1985) 4 SCC 169] the Supreme Court quashed a scheme that the Uttar Pradesh State Road Transport Corporation had published in 1959 under Section 68-C of the Motor Vehicles Act, 1939. It was, however, left open to the state transport undertaking to publish a fresh draft scheme, if necessary. The state transport corporation published a fresh scheme in 1986 under the same provision. Objections were filed to the scheme but before they could be decided, the Motor Vehicles Act, 1988 came into force in 1989 repealing the Motor Vehicles Act, 1939. The competent authority thereafter held that the proposed scheme had lapsed by virtue of Section 100(4) of the 1988 Act. The state transport corporation preferred a writ petition but the Allahabad High Court also took the view that the scheme had lapsed and accordingly upheld the order of the competent authority and dismissed the writ petition. The appeal against the decision of the High Court was allowed by the Supreme Court in 1992 [Ram Krishna Verma v. State of U.P. (1992) 2 SCC 620] though the grant of permits under Section 80 of the 1988 Act to some of the private operators was quashed. The competent authority was directed to approve the draft scheme within a period of 30 days from the date of receipt of the judgment and publish the same. While the competent authority was hearing the objections, the State Government published a notification in 1993 whereby the draft scheme published in 1986 under Section 68-C of the old Act was approved. The notification specifically mentioned that the decision was taken in view of the directions given by the Supreme Court in the Ram Krishna Verma case. Several operators filed writ petitions in the High Court against the 1993 notification but they were dismissed in 1999 on the ground that the scheme stood approved by the decisions of the Supreme Court in the case of Ram Krishna Verma and also in Nisar Ahmad v. State of U.P. [(1994) Supp. (3) SCC 460]. The appeals preferred against the judgment of the High Court were allowed by the judgment reported at (2001) 5 SCC 762 (Gajraj Singh v. State of U.P.). It was held in Gajraj Singh that the Ram Krishna Verma case was confined only to the Saharanpur-Shahdara- Delhi route; that the notification published in 1986 included 38 other routes which had not been approved by the Supreme Court; and, that objections relating to the other routes were required to be considered on merits. The competent authority decided the objections. The state transport corporation and some private operators questioned such decision in writ petitions before the High Court. The High Court held that the draft scheme of 1986 had lapsed under Section 100(4) of the 1988 Act and it could not be approved or modified and, accordingly, the draft scheme of 1986 and the approved scheme of 1993 as modified by the order impugned in the immediate proceedings were quashed.
The Supreme Court held in the judgment now cited by the bank that such issue could not have been raised or revisited by the High Court since it stood concluded by the Supreme Court decision in Ram Krishna Verma. It held that in the judgments of both Ram Krishna Verma and Nisar Ahmad the Supreme Court had opined that the 1986 scheme had not lapsed notwithstanding Section 100(4) of the 1988 Act. It observed that, in any event, the order in Gajraj Singh directed the 1993 notification, which approved the 1986 scheme, to be modified upon taking into account the objections thereto that remained pending. The Supreme Court referred to previous judicial pronouncements on the legal issue and held at paragraph 11, "11. The principle of res judicata is based on the need of giving a finality to judicial decisions. The principle which prevents the same case being twice litigated is of general application and is not limited by the specific words of Section 11 of the Code of Civil Procedure in this respect. Res judicata applies also as between two stages in the same litigation to this extent that a court, whether the trial court or a higher court having at an earlier stage decided a matter in one way will not allow the parties to reagitate the matter again at a subsequent stage of the same proceedings."
What must first be seen in the present case is as to what was decided by the order of March 27, 2009 on the previous petition carried by these petitioners. It is true that the legality of the master circular was not questioned in the previous proceedings but the Court made it clear that "no opinion is expressed on merits of the ... claim and all points are left open for being agitated ... before the Committee." Assume that the earlier petition was heard on merits and dismissed. If such judgment were not appealed against, it would still not have prohibited a challenge to the final order of the grievance redressal committee to be made notwithstanding the petitioners being estopped from advocating the grounds already urged and rejected. It is extremely doubtful, as a legal proposition, that a subsequent writ petition against a final order cannot incorporate a challenge to the legality of the statute or notification under which the impugned proceedings were conducted by virtue of an earlier challenge against the show-cause notice having been rejected on merits when the legality of the relevant statute or notification had not been questioned at the earlier stage. The principle of estoppel or res judicata would not apply where to give effect to such principle a statutory direction or prohibition would have to be overridden. There is no good reason for not extending such immunity from the principle to a case where the inherent lack of jurisdiction is cited in a subsequent petition, which is otherwise maintainable, but such ground had not been urged in the previous proceedings which were dismissed on merits. In any event, for the principle to apply there would first have to be a previous concluded decision on merits; and in the present case the order of March 27, 2009 left all questions open. It would be extremely harsh and legally irrational to hold that only the points urged in the previous decision - though not conclusively decided - could be taken in this subsequent action, but the grounds missed out or otherwise not taken could not be entertained. If it is the accepted position that inherent lack of jurisdiction would render the act a nullity and such ground could be set up anywhere even collaterally, it would defy logic to not permit a challenge to the validity of the master circular - in furtherance of a ground of inherent lack of jurisdiction - to be now maintained on account of the previous decision which left all questions open.
So much for the prelude to the real dispute. Some matters already noticed will again fall for consideration but the basis for assessment thereof will have to be in the context that they next come up.
The petitioners have fashioned their attack on the bank's invocation of the master circular and its grievance redressal committee's decision of April 7, 2009 on six major counts. The validity of the master circular is questioned primarily on the principle embodied in the maxim, nemo debet esse judex in propria sua causa (nobody shall be judge of his own cause). The petitioners are aggrieved at the Reserve Bank failing to rein in the private bank. They suggest that the bank has sought to pre-judge a matter that it has referred to arbitration and has sought to irretrievably condemn the petitioner even during the pendency of the reference. They say that the bank has failed to comply with the due process contemplated by the master circular. They allege that the general bias of the bank and its grievance redressal committee is accentuated by the presence on the committee of a gentleman who has been conducting all litigation against the petitioner company on behalf of the bank. The petitioners assert that since the bank did not lend the company any money nor did the company borrow from the bank, there is no lender-borrower relationship between the two that is the sine qua non for the invocation of the master circular.
The petitioners say that the master circular involves a two-stage procedure:
a committee of higher functionaries of the bank has to identify a case of willful default and inform the borrower of the bank's proposal to classify the borrower as such; and then, the borrower is to be provided reasonable time for making a representation to a grievance redressal committee to be constituted by the bank for such purpose. Clause 3 of the master circular, indeed, requires the decision to classify the borrower as a willful defaulter to be entrusted to a committee of "higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI." The clause advises that the decision taken on classification of willful defaulters should be well documented and supported by requisite evidence and it should clearly spell out the reasons for which the borrower has been declared "as willful defaulter vis-à-vis RBI guidelines." The second stage involves a representation against the decision of the previous committee, if the borrower so desires, to a "Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials." The above grievance redressal committee is required to "also give a hearing to the borrower if he represents that he has been wrongly classified as willful defaulter." Thereafter, a final declaration as willful defaulter may be made after a view is taken by the grievance redressal committee on the representation of the borrower and "the borrower should be suitably advised."
The petitioners say that it is the third clause which is at the heart of the master circular and such provision is patently arbitrary in that it leaves a borrower and its reputation completely at the mercy of the concerned bank or financial institution. The petitioners claim that the internal remedy to redress a wrong, incorporated in the third sub-clause, is unreasonable and illusory and contemplates only an appeal from Caesar to Caesar's wife which has always been frowned upon. They bring a judgment reported at (1985) 3 SCC 267 (Ram and Shyam Company v. State of Haryana) where, in the a discussion on the efficacy of the alternative remedy cited, the Supreme Court observed since the impugned decision was effectively taken by the Chief Minister of the State, the alternative remedy was illusive and produced those famous words that an "appeal from Caesar to Caesar's wife can only be bettered by appeal from one's own order to oneself." In support of their contention that such a scenario would expose a borrower to a real likelihood of bias, the petitioners rely on another celebrated judgment reported at (1978) 1 SCC 405 (Mohinder Singh Gill v. The Chief Election Commissioner, New Delhi) for the quotation therein from an English judgment to the effect that justice must be rooted in confidence and confidence is destroyed when right-minded persons go away thinking that the judge was biased.
The petitioners argue that if clause 3 of the master circular intrinsically exudes the genuine likelihood of bias it would make the provision unfair and ultra vires the Constitution. They rely on another oft-noticed judgment reported at (1969) 1 QB 577 (Metropolitan Properties Co. (F.G.C.) Ltd. v. Lannon) and place the following passages to put across the point:
"A man may be disqualified from sitting in a judicial capacity on one of two grounds. First, a "direct pecuniary interest" in the subject-matter. Second, "bias" in favour of one side or against the other."
"So far as bias is concerned, it was acknowledged that there was no actual bias on the part of Mr. Lannon, and no want of good faith. But it was said that there was, albeit unconscious, a real likelihood of bias. This is a matter on which the law is not altogether clear: but I start with the oft- repeated saying of Lord Hewart C.J. in Rex v. Sussex Justices, Ex parte McCarthy: "It is not merely of some importance, but is of fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done."
"In Reg. v. Barnsley Licensing Justices, Ex parte Barnsley and District Licensed Victuallers' Association, Devlin J. appears to have limited that principle considerably, but I would stand by it. It brings home this point: in considering whether there was a real likelihood of bias, the court does not look at the mind of the justice himself or at the mind of the chairman of the tribunal, or whoever it may be, who sits in a judicial capacity. It does not look to see if there was a real likelihood that he would, or did, in fact favour one side at the expense of the other. The court looks at the impression which would be given to other people. Even if he was as impartial as could be, nevertheless if right-minded persons would think that, in the circumstances, there was a real likelihood of bias on his part, then he should not sit. And if he does sit, his decision cannot stand: see Reg. v. Huggins; and Rex v. Sunderland Justices, per Vaughan Williams L.J. Nevertheless there must appear to be a real likelihood of bias. Surmise or conjecture is not enough: see Reg. v. Camborne Justices, Ex parte Pearce, and Reg. v. Nailsworth Licensing Justices, Ex parte Bird. There must be circumstances from which a reasonable man would think it likely or probable that the justice, or chairman, as the case may be, would, or did, favour one side unfairly at the expense of the other. The court will not inquire whether he did, in fact, favour one side unfairly. Suffice it that reasonable people might think he did. The reason is plain enough. Justice must be rooted in confidence: and confidence is destroyed when right- minded people go away thinking: "The judge was biased."
It is submitted that there is no gainsaying that only if a bank or financial institution had internally decided that a borrower would be branded as a willful defaulter would the notice be issued to the borrower for such purpose and the remedy of a representation to the domestic grievance redressal committee would be a facetious exercise in futility. The petitioners exhort that such manifestly unjust procedure would fall foul of Article 14 of the Constitution and rely on the judgment reported at (1978) 1 SCC 248 (Maneka Gandhi v. Union of India) to emphasise the content and reach of the equalising principle enunciated in Article 14 which was held to be the founding faith of the Constitution. In the leading opinion rendered on behalf of three of the seven judges on the Bench, the pronouncement of the law by a Constitution Bench of Five Judges in E.P. Royappa v. State of Tamil Nadu [(1974) 4 SCC 3] was quoted with approval in its assertion that, "equality is antithetic to arbitrariness" and "equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic, while the other, to the whim and caprice of an absolute monarch."
The petitioners submit that clause 3 is the mainstay of the master circular and if that is struck down, it would be as if the heart is robbed of a person. The petitioners say this in response to a stand taken on affidavit by the bank that even if clause 3 were to go, the master circular would otherwise be valid and leave enough residuary ammunition for the petitioner company to be dealt with thereunder. The petitioners rely, in this context, on the Bank Nationalisation case reported at (1970) 1 SCC 248 (Rustom Cavasjee Cooper v. Union of India) and paragraph 121 of the report:
"121. Section 4 of the Act is a kingpin in the mechanism of the Act. Sections 4, 5, and 6, read with Schedule II provide for the statutory transfer and vesting of the undertaking of the named banks in the corresponding new banks and prescribe the method of determination of compensation for expropriation of the undertaking. Those provisions are, in our judgment, void as they impair the fundamental guarantee under Article 31(2). Sections 4, 5, and 6 and Schedule II are not severable from the rest of the Act. The Act must, in its entirety, be declared void."
The petitioners also cite a passage from A Treatise on the Constitutional Limitations by Thomas M Cooley, a part of which is quoted in the Gold Control case [(1969) 2 SCC 166 (Harakchand Ratanchand Banthia v. Union of India)]:
"... It would be inconsistent with all just principles of constitutional law to adjudge these enactments void, because they are associated in the same act, but not connected with or dependent on others which are unconstitutional. Where, therefore, a part of a statute is unconstitutional, that fact does not authorize the courts to declare the remainder void also, unless all the provisions are connected in subject-matter, depending on each other, operating together for the same purpose, or otherwise so connected together in meaning, that it cannot be presumed the legislature would have passed the one without the other. The constitutional and unconstitutional provisions may even be contained in the same section, and yet be perfectly distinct and separable, so that the first may stand though the last fall. The point is not whether they are contained in the same section; for the distribution into sections in purely artificial; but whether they are essentially and inseparably connected in substance. If, when the unconstitutional portion is stricken out, that which remains is complete in itself, and capable of being executed wholly independent of that which was rejected, it must be sustained. The difficulty is in determining whether the good and bad parts of the statute are capable of being separated within the meaning of this rule. If a statute attempts to accomplish two or more objects, and is void as to one, it may still be in every respect complete and valid as to the other. But if its purpose is to accomplish a single object only, and some of its provisions are void, the whole must fail unless sufficient remains to effect the object without the aid of the invalid portion. And if they are so mutually connected with and dependent on each other, as conditions, considerations, or compensations for each other, as to warrant the belief that the legislature intended them as a whole, and if all could not be carried into effect, the legislature would not pass the residue independently, then if some parts are unconstitutional, all the provisions which are thus dependent, conditional, or connected must fall with them."
Though the bank seeks to brush aside the challenge to the legality of the master circular in a lighter vein that it is customary for any delinquent in a spot to question the constitutional validity of an uncomfortable provision under which he is booked, it is the Reserve Bank which has jumped more passionately into the fray in its understandable fervour to uphold its circular. The bank mentions that apart from the fact that the legitimacy of the master circular had not been assailed in the previous petition, such ground was not indicated to the bank or its grievance redressal committee in the numerous missives delivered to the bank by or on behalf of the petitioner company. The bank's stand is unclear as to why such irrelevant matters are referred to as its second line of defence to stave off a challenge to the legality of the circular, but it appears the bank seeks to raise a cloud of estoppel. Before proceeding to the more meritorious grounds of resistance offered by the Reserve Bank, such frivolous opposition must be summarily scotched. There would have been no sequitur to such assertion even if the petitioner company had prefaced every letter issued to the bank with a challenge to the validity of the master circular or clambered up to every rooftop of vantage to shout it out therefrom. The bank could not have arrogated unto itself the authority to entertain the issue by reason of its regulatory subservience to the author of the master circular and on the recognition that neither it nor any committee of its officers has yet been conferred the power of judicial review.
On the substance of the challenge to the validity of the master circular, the bank says that such circular provides for a blacklisting of sorts. The bank contends that blacklisting is neither impermissible nor arbitrary and judicial pronouncements only require adequate safeguards to be introduced in the procedure so that the person sought to be blacklisted is not condemned unheard. The bank refers to the judgments reported at (1975) 1 SCC 70 (Erusian Equipment and Chemicals Ltd. v. State of West Bengal) and (1989) 1 SCC 229 (Raghunath Thakur v. State of Bihar) that provide that since an order of blacklisting has civil consequences for the future business of the person affected, he has to be afforded a right to make a representation and be heard before the order can be made. The bank says that usually blacklisting is also done by the same department or organisation with whom the person sought to be blacklisted engages in business. It is the bank's case that if a government department can have the right to blacklist a contractor, subject to hearing him, a bank may also effectively blacklist one of its borrowers by holding him to be a willful defaulter under the master circular. The bank submits that the bank has an inherent right to brand one of its customers as a defaulter and that the consequence of such branding has been widened under the Reserve Bank's master circular should, in principle, not make any difference.
The Reserve Bank is more studied in its approach to the attack on its circular. It says that the law relating to bias has moved on in India and the traditional concept of likelihood of bias is no longer the accepted position, particularly in economic matters. It contends that courts in India are now loath to entertain a generic challenge founded on likelihood of institutional bias though individual, personal bias still remains a germane consideration if supported by adequate particulars. The Reserve Bank brings a judgment reported at (2004) 11 SCC 625 (Delhi Financial Corpn. v. Rajiv Anand) and emphasises the subtle shift apparent from this passage at paragraph 14 of the report:
"14. Thus, the authorities disclose that mere appointment of an officer of the corporation does not by itself bring into play the doctrine that "no man can be a judge in his own cause". For that doctrine to come into play it must be shown that the officer concerned has a personal bias or a personal interest or has personally acted in the matter concerned and/or has already taken a decision one way or the other which he may be interested in supporting. ..."
The Reserve Bank states that the validity of the master circular has been upheld by the Delhi High Court and commends the reasoning in an unreported judgment of that Court in W.P.(C) 7036 of 2007 (Sudarshan Overseas Ltd. v. Reserve Bank of India) delivered on May 28, 2009. Paragraphs 11 and 12 of the judgment record the main reasons:
"11. A bare perusal of the aforesaid clause indicates that safeguards have been provided to protect the borrowers by ensuring that the decision to classify a borrower as a willful defaulter is entrusted to a Committee, which is headed by the Executive Director of the concerned bank/financial institution. Before a borrower is classified as a willful defaulter, he is required to be issued notice along with the documents and other evidence. The borrower is to be provided with reasonable time to make representation against the proposed action. Thereafter decision has to be taken whether a borrower is to be declared as a willful defaulter and the borrower is to be informed. Thus there are number of stipulations and safeguards in the said Master circular to protect the interest of the borrowers.
"12. The object and purpose behind issuing the Master Circular is obvious and the desire to maintain a list of willful defaulters as defined is per se justified. One scheme or other in this regard has existed from 1994. The Master Circular has been issued to remove loopholes and rectify defects and problems noticed in the past. It is a policy decision, which has been taken after careful thought, past experience, problems faced by the banks and financial institutions. ..."
On such aspect of the matter the Reserve Bank rests its case with that trendy incantation that prompts a more deferential moderation by courts: that the making of the master circular is a matter of policy in a crucial area of the economic activity. The central bank claims that such policy decision is based on the bitter recovery experience of banks and financial institutions and has the technical backing of expert studies and reports. It refers to a judgment reported at (2003) 4 SCC 289 (Federation of Rly Officers' Assn v. Union of India) for the proposition that the scope of judicial review is extremely restricted in matters of policy evolved by the government.
The limited challenge to the validity of the master circular does not appeal. The only ground put forth by the petitioners is the apparent arbitrariness in permitting banks and financial institutions to be party, judge and jury all rolled into one and that such procedure is overwhelmingly loaded against the borrower who is, more often than not, disadvantaged in his bargaining capacity from the inception of the relationship. One need not go much beyond the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and its vires being upheld for an answer to the petitioner's challenge to the master circular. The said Act goes against the general grain of jurisprudence adopted in the country. It envisages possession of a secured interest to be taken first and the propriety thereof to be adjudicated upon later. The raison d'être of the 2002 Act and the rationale for its ineffective forerunner in banking law in the country, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, were the proliferation of blocked assets of banks and financial institutions in claims against borrowers being embroiled in unproductive legal actions that continued interminably. If against such backdrop a regime is put in place that makes the process of realisation of bank dues swifter and permits banks and financial institutions to exchange notes on delinquents, there is enough justification in the policy even if the policy is probed.
Whether it is in the acceptance of the process of adjudication under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 or the recognition of departmental arbitration, to cite but a few instances, there is a growing reluctance to receive challenges founded on the generic apprehension of institutional bias, though it is not altogether ruled out or never entertained. If a secured creditor under the 2002 Act need only consider, but rule as it may choose, following an objection received from a borrower to the creditor's notice under Section 13(2) of such Act; and if such procedure sanctioned by law has the imprimatur of the highest judicial authority of the land, there is little room to challenge a bank's right under the master circular to assess that the default on the part of its borrower-constituent is deliberate.
There may also be a further safeguard in the ordinary case, in addition to the dual-stage format that the master circular envisions in its third clause. It appears that the any assessment of the creditworthiness (and, as a corollary, the lack of it) of a borrower (which includes a client in the relevant statute) by a credit institution (which includes banks and financial institutions in such enactment) is subject to statutory arbitration under the aegis of the Reserve Bank by virtue of Section 18 of the Credit Information Companies (Regulation) Act, 2005.
Though the petitioners indicated in the introductory submission that there was another dimension to their challenge to the validity of the master circular if such circular were used to rope in any person having other permitted business dealings with a bank but not being a person who had availed of credit facilities from the bank, the petitioners appear to have reserved the ammunition for use in their foremost contention that in the petitioner company not being a borrower of the bank, the master circular could not have been invoked against it.
The second count of challenge on merits - the first of three successive seemingly minor charges - is of the Reserve Bank not harnessing the private bank as it shot like a loose cannon down a mountain slope to denigrate the petitioner company and sully the company's self-proclaimed pristine credit record. There would be value in the point if the Reserve Bank was of the opinion that the master circular could not be applied to anyone placed as the petitioner company was or even harboured doubts as to its applicability. The Reserve Bank insists that the company answered to the description of a borrower under the master circular and was liable to have such circular used against it. The Reserve Bank's foundation for justifying the bank's invocation of the circular will call for a closer scrutiny in another context, but for the immediate discussion it would suffice that not only does the regulating bank insist that the application of master circular to the company was in order but the central bank seems to extend its tacit endorsement to the decision of the private bank's grievance redressal committee.
If the Reserve Bank bonafide carried an impression - whether or not it was erroneous - that the master circular would encompass the transaction between the company and the bank and if the apex bank exercised discreet superintendence by forwarding the company's letter to the bank to inform it that it had been reported against, there can be no legitimate accusation of the Reserve Bank having acted injudiciously. The Reserve Bank played its role as a dispassionate elder statesman not engaging in the spat but keeping an eye on it from a distance.
The third charge is of the bank prejudging the issue notwithstanding its pending reference in support of its claim and the company's suit yet to be played out before the City Civil Court. The petitioners say that if they have to put up the money that the bank demands to escape the evil consequence of the publication of the bank adjudging the company as a willful defaulter, nothing remains in the arbitral reference or the bank's obligation to obtain the money by implementing the award that it is so sure to get; not to speak of the company's suit that is stultified by a cavalier stroke of the grievance redressal committee's pen. The petitioners refer to the scope of the arbitral reference by placing the main issues framed therein:
"1) Whether the arbitration agreement contained in the ISDA Master Agreement dated 17th January 2006 is valid and binding on the parties.
2) Whether the ISDA Master Agreement dated January 27, 2006, along with the Schedule thereto, and the Deal Confirmations dated September 6, 2007 and June 26, 2007 are valid and binding on the Respondent?
3) Whether the Claimant is entitled to specific performance by the Respondent of the ISDA Master Agreement dated January 17, 2006 and Transaction 1 and Transaction 2 entered into thereunder?
4) Whether the Respondent is liable to pay to the Claimant the amount of USD. 1,980,000/- (equivalent to INR. 8,34,72,600/- as on June 10, 2008) under Transaction 1 as claimed by the Claimant in its particulars of Claim?
5) Whether the Respondent is liable to pay to the Claimant such further amounts that may become due under Transaction 1 and/or Transaction 2 on the various statement dates thereunder, as claimed by the Claimant in its Particulars of Claim, as amended from time to time?
6) Whether the Respondent is liable to pay interest to the Claimant at the default rate of interest as applicable from time to time, on the unpaid/claimed amounts, from the respective due dates of payment until payment and/or realization thereof? If so, at what rate/rates?"
The bank retorts that there is no virtue in denying a legitimate claim for denial's sake and taking advantage of the usual delay of the legal process. It says that if the law and practice permitted it to pursue its claim in an agreed forum and independently take action for the petitioner company's recalcitrance, the bank cannot be faulted for so doing. It claims that since there is no justification for the petitioner company to withhold what is rightfully and contractually due to the bank, the bank was well within its rights adopt the procedure designed by the Reserve Bank to document and disseminate information as to the petitioner company's intransigence.
Again, there a ready analogy from contemporary banking laws to ascertain this charge levelled by the petitioners. A bank or a financial institution as a secured creditor may proceed against its securities under the Securitisation Act of 2002 irrespective of its principal claim pending adjudication before a Debts Recovery Tribunal. That is a harsher course of action from the constituent's perspective than the bank's act complained of here. If the master circular is valid and it its applicability is unfettered by the pendency of the underlying claim, its due operation cannot be circumscribed by impassioned arguments of prejudice not rooted to any discernible legal right.
The fourth head of challenge is in the bank's alleged failure to comply with procedural due process. The petitioners say that since the master circular is otherwise unsympathetic to the borrower, assuming for the moment that the petitioner company was a borrower, the little mercies afforded therein to the borrower must necessarily be adhered to or the ultimate outcome be condemned for not conforming to due process. The petitioners complain of the tactlessness of the bank in charging the petitioner company with misconduct by its show-cause notice of October 22, 2008 without disclosing the basis of the decision of the "Committee of higher functionaries" that clause 3(i) of the master circular mandates. The petitioners question the procedure adopted by the bank in not even informing the petitioner company as to the composition of the initial committee. The petitioners criticise the bank's omission to furnish to the company the documentation and requisite evidence that weighed with the committee at the first of the two stages that clause 3(ii) of the master circular commands. They assert that this was indispensable if the process had to progress to the second stage and was a precondition to the assumption of jurisdiction by the grievance redressal committee. They point out that even the second limb of clause 3(ii) of the master circular was observed in the breach upon the petitioner company not being favoured with any clearly spelt-out decision of the initial committee. The company, they lament, was not given any insight of what weighed with the initial committee to enable the company to address the misgivings and allay the misapprehension.
The charge amounts to an allegation of violation of the principles of natural justice. Not every attribute of the rules of natural justice needs to be inflexibly complied with in every instance, nor will the writ court make such a rigorous demand. What is imperative is that there has to be substantial compliance with the rules of fairplay that any form of justice would demand. If it appears that the authority discharging a quasi-judicial function enters upon the matter with an element of predisposition, then the course of action that it charts out and the reasons that it ultimately gives call for a more stern examination. The writ court may be more searching in its exercise of assessing the decision-making process to discover whether the transgression in the procedure can be linked to the quasi-judicial authority's endeavour to rush through the formalities to arrive at the inevitable conclusion.
But there appears to be substantial compliance with the procedure set down by the master circular. The bank's notice of October 22, 2008 sufficiently directs the petitioner company to what it needed to address and adequately informed the company of the basis for the company's opinion. That the letter did not expend a few more lines on the deliberations of the initial committee or its composition may be for the same reason that it did not describe the weather outside when it was drafted and such nitpicking in the conduct of a non-judicial forum is unwarranted.
That brings the matter down to the two core issues: whether the process was actuated by malice and otherwise biased; and, whether there was an erroneous assumption of jurisdiction under the master circular by either committee of the bank.
The petitioners allege bias in the presence of a certain Mr. Sathe on the grievance redressal committee set up by the bank. It is said that the gentleman had represented the bank at almost every meeting in the arbitral reference, that he has been the bank's pointsman in its matters against the petitioner company and it is announced, with the flourish associated in driving home a point of pure prejudice, that he has been in attendance (probably post-retirement) on each day that this hearing has covered.
The petitioners first place a judgment reported at AIR 1959 SC 308 (Gullapalli Nageswara Rao v. Andhra Pradesh State Road Transport Corporation) and rely on paragraph 30 thereof. It was held that the primary attribute of a person entitled to adjudicate had to be his personal indifference to the matter. The Supreme Court disapproved of the procedure where a secretary to the Government of Madras in the transport department who was the final departmental authority to approve a scheme subsequently heard and ruled on the objections to the scheme that he had framed in the first place.
Another judgment reported at (1969) 2 SCC 262 (A.K. Kraipak v. Union of India) is cited where an individual who had personal interest sat on a committee. His interest was immediate and as part of the committee he had to assess his own case for selection. Though he opted out of the deliberations when his candidature was deliberated upon, it was felt that his presence on the committee vitiated the process. Paragraph 15 of report brings out the facts and the principle that was enunciated:
"15. It is unfortunate that Naqishbund was appointed as one of the members of the selection board. It is true that ordinarily the Chief Conservator of Forests in a State should be considered as the most appropriate person to be in the selection board. He must be expected to know his officers thoroughly, their weaknesses as well as their strength. His opinion as regards their suitability for selection to the All India Service is entitled to great weight. But then under the circumstances it was improper to have included Naqishbund as a member of the selection board. He was one of the persons to be considered for selection. It is against all canons of justice to make a man judge in his own cause. It is true that he did not participate in the deliberations of the committee when his name was considered. But then the very fact that he was a member of the selection board must have had its own impact on the decision of the selection board. Further admittedly he participated in the deliberations of the selection board when the claims of his rivals particularly that of Basu was considered. He was also party to the preparation of the list of selected candidates in order of preference. At every stage of his participation in the deliberations of the selection board there was a conflict between his interest and duty. Under those circumstances it is difficult to believe that he could have been impartial. The real question is not whether he was biased. It is difficult to prove the state of mind of a person. Therefore what we have to see is whether there is reasonable ground for believing that he was likely to have been biased. We agree with the learned Attorney-General that a mere suspicion of bias is not sufficient. There must be a reasonable likelihood of bias. In deciding the question of bias we have to take into consideration human probabilities and ordinary course of human conduct. It was in the interest of Naqishbund to keep out his rivals in order to secure his position from further challenge. Naturally he was also interested in safeguarding his position while preparing the list of selected candidates."
For the same effect, the petitioners have next brought a judgment reported at (1984) 4 SCC 103 (J. Mohapatra and Co. v. State of Orissa). The petitioners also refer to the Parliament cash-for-questions decision reported at (2007) 3 SCC 184 (Raja Ram Pal v. Hon'ble Speaker, Lok Sabha) for the proposition that the principles of natural justice are built in to Articles 14, 19 and 21 of the Constitution. Paragraphs 671 and 672 have been placed from the report:
"671. It was also urged that the Committee had not given sufficient opportunity to the petitioners to defend them and had not complied with the principles of natural justice and fair play. It was submitted that the doctrine of natural justice is not merely a matter of procedure but of substance and any action taken in contravention of natural justice is violative of fundamental rights guaranteed by Articles 14, 19 and 21 of the Constitution. Reference in this connection was made to Maneka Gandhi v. Union of India, Kihoto Hollohan and other decisions.
"672. So far as principle of law is concerned, it is well settled and cannot be disputed and is not challenged. In my opinion, however, in the facts of the case, it cannot successfully be contended that there is breach or non- observance of natural justice by the Committee. Reading of the reports makes it clear that adequate opportunity had been afforded to the petitioners and thereafter the action was taken. Notices were issued to the Members, CDs were supplied to them, evidence of witnesses was recorded, defence version was considered and "findings and conclusions" were reached."
The bank says that the petitioner company did not assert in its voluminous correspondence either that Mr. Sathe was personally inimical to the company or that his being on the committee was a matter of concern to the company. The bank argues that the petitioner company took a chance with eyes wide open and should not be permitted to question the gentleman's presence on the committee. The bank contends that despite the company's reservation on certain other scores, it wholeheartedly submitted to the grievance redressal committee's jurisdiction and is deemed to have waived any objection as to the composition thereof. The bank refers to a judgment reported at AIR 1957 SC 425 (Manak Lal v. Dr. Prem Chand Singhvi) and another reported at (1997) 1 SCC 111 (U.D. Lama v. State of Sikkim). In Manak Lal the appellant did not object to the presence of a particular member on the tribunal and the Supreme Court concluded that in so acting, the appellant was precluded from raising such objection at a later stage before the court. That the timing of the objection in such regard is of crucial importance has also been recognised in the following passage at paragraph 15 of the report in U.D. Lama:
"15. ... Moreover, this objection should have been made as soon as the Second Committee was constituted. It has to be borne in mind that the Second Committee was constituted because of the objections of the writ petitioners against the recommendations made by the first Committee headed by Justice D.M. Sen. It is on record that objections of the writ petitioners were taken into consideration by the Second Committee. It is not the case of the writ petitioners that they took this point before the Committee and the Committee overlooked this point. We are of the view that this point cannot be allowed to be urged at this belated stage."
The Reserve Bank does not find Mr. Sathe's presence on the committee to be objectionable. It submits that since the petitioner company was aware of the composition of the grievance redressal committee and had voluntarily appeared before it without the slightest reservation on such count, the company had gambled for obtaining a favourable result. In support of such argument it relies on a judgment reported at (1976) 3 SCC 585 (Dr. G. Sarana v. University of Lucknow) and places paragraph 15 of the report:
"15. We do not, however, consider it necessary in the present case to go into the question of the reasonableness of bias or real likelihood of bias as despite the fact that the appellant knew all the relevant facts, he did not before appearing for the interview or at the time of the interview raise even his little finger against the constitution of the Selection Committee. He seems to have voluntarily appeared before the committee and taken a chance of having a favourable recommendation from it. ..."
Though the bank's general refrain in response to almost every head of challenge brought by the petitioners has been estoppel or waiver, this is the one instance where the argument serves it well. There is no murmur in any of the company's several representations of the gentleman's presence being of any consequence to the company. The petitioners have not demonstrated that he bore any personal animosity against the company. His mere association on behalf of the bank in proceedings against the petitioner company would not warrant such challenge to be received on merits. In any event, in the company not having taken such protest before the committee or even in the detailed submission made immediately upon the conclusion of the hearing before the committee, it had voluntarily relinquished a right that it ought to have been aware of and cannot now be permitted to resurrect it.
Further, if the petitioner company had aired its misgiving on such account at or prior to the hearing, or even immediately thereafter, it would have afforded the bank or its committee to take care of the perceived shortcoming. It would have been entirely different if the petitioner company had cited good grounds for Mr. Sathe's exclusion from the committee and the committee had still persisted with him thereon. But the petitioner company did not afford the grievance redressal committee an opportunity to right the wrong, if a wrong at all it was.
The final count of the petitioners' challenge is as to the bank's authority to invoke the master circular in respect of the company's transactions with the bank.
The range accrual transaction involved a daily payout of Euro 10,000 by the petitioner company to the bank if at any time between March 15, 2007 and March 13, 2008 the exchange rate between Euro and US dollar fixed above 1.41. The company's liability to pay would stop altogether if the exchange rate any time thereafter struck 1.3130. The company has narrated in its counter-statement in the arbitral reference that under the range accrual transaction there was no option either to buy or sell any foreign exchange nor was any rate fixed therefor. It has averred that the payout had no nexus with the losses that arose due to foreign exchange value fluctuations. It is the company's case in the reference that the transaction was neither a forward contract nor an option contract and it certainly was not a derivative transaction within the meaning of the Reserve Bank of India Act. It has, however, been the bank's consistent stand that the International Swaps and Derivatives Association (ISDA) Master Agreement entered into with the company contemplated foreign exchange derivative transactions. The bank's show-cause notice of October 22, 2008 listed the range accrual transaction as an option transaction. The bank's claim against the company is based on both the ISDA agreement and the range accrual transaction. In course of the hearing, the bank has simplified matters by asserting that the transaction between it and the company was in derivatives.
The petitioners refer copiously to the master circular to suggest that it was intended to cover only the typical lender-borrower transactions that banks and financial institutions primarily engage in. The petitioners place the key sentence in the introductory paragraph of the circular that implies that willful defaults covered "all non-performing borrowal accounts with outstandings (funded facilities and such non-funded facilities which are converted into funded facilities) aggregating Rs.25 lakh and above ..." The petitioners stress on clause 2.1 of the circular that defines willful default. They take pains to demonstrate that each of the four situations covered in the definition clause refers to "payment/ repayment obligations to the lender." They submit that the expression "lender" is not to be equated with creditor and, in the context of the circular, banks and financial institutions covered thereby would be lenders if the relevant agreements involved an actual flow of funds from the banks and financial institutions to a customer against a promise of future repayment thereof with appropriate interest. The petitioners suggest that the respondents' enthusiasm in the use of "payment/ repayment" in each of the situations covered by the definition of willful default is misplaced since repayment would point to the return of the fund made available by a bank or financial institution to its customer and payment would point to the interest to be earned on the credit facilities granted.
The petitioners refer to the penal measures detailed under clause 2.5 of the master circular. The four measures suggested, according to the petitioners, contemplate a lender-borrower relationship in each case. The first penal action recommended is that no additional facilities should be granted by any bank or financial institution to the listed willful defaulter; the second suggests legal process against "borrower/guarantors and foreclosure of recovery of dues"; the third action proposes a proactive approach for a change of management in the defaulter company; and, the fourth refers to loan agreements and advises banks and financial institutions to introduce a clause in the loan agreements that the borrowing company should not induct any person on its board who is the promoter or a director of a company which has been identified as a willful defaulter.
The petitioners insist that for the master circular to apply there must be an agreement at the inception of the relationship with a bank or a financial institution that would provide for a flow of ascertained funds from the bank or financial institution to its customer.
The bank submits that the rationale for invoking the master circular is found in the grievance redressal committee's decision of April 7, 2009. It says that if an expert group of experienced bankers understood the words "borrower" and "lender" used in the master circular to imply "debtor" and "creditor" in banking parlance, it would meet the test in judicial review. After all, the committee comprising experts had considered the objection, applied their collective mind thereto and expressed their considered opinion thereon. The bank submits that the committee's handling of the issue was appropriate and, since judicial review is not akin to appellate authority, the perceived error of qualified professionals engaged in a specialised field should not call for any correction in this jurisdiction.
The bank has handed over a bunch of documents in course of the hearing which had been forwarded to the petitioners under cover of a letter dated July 21, 2009. It refers to a sanction letter of January 10, 2006 which describes the petitioner company as "the borrower." The bank places particular reliance on the tenor or the letter and the terms set out in the table forming part of the sanction letter. The bank says that the use of the words "limits" and "facility" and the stipulation therein for cash collaterals and like securities to be furnished by the petitioner company would only admit of a lender-borrower engagement between the bank and the petitioner company. The material parts of the sanction letter and the table set out therein provide as follows:
"Banking Facilities We, Kotak Mahindra Bank Ltd. 13th floor, Nariman Bhavan, 227-Nariman Point, Mumbai-400 021 (herein after referred to as 'KMBL') are pleased to inform Hindustan National Glass & Industries Limited (herein after referred to as 'the borrower') that the following facility has been sanctioned to you. The facility is subject to compliance with conditions stated hereunder. This letter and Annexures supercede all our oral and written communication on this subject:
Limits INR 2,00,00,000/- (Rupees Two Crores only)
Validity of Facility Forward Contracts: Maximum 1 Year
Derivative : Maximum 3 years with 1
year break clause
Documentation 7. The borrower to furnish proof of underlying exposure which is sought to be hedged, in a form acceptable to KMBL.
Other conditions 8. Undertaking from the borrower to cash collateralise the negative MTM (over & above the limit of INR 200 Las) every 15 days
9. The cash collateralisation shall be in the form of Fixed Deposit under lien to KMBL.
The bank places the company's acknowledgement of such sanction letter and its unreserved acceptance of the terms and conditions contained therein. One such acknowledgement would appear from a writing executed by a joint managing director of the company on February 6, 2006:
"We hereby acknowledge receipt of your sanction letter No. CB/100106/1298 and annexures dated January 10, 2006 of which this a copy.
We accept and agree to be bound by the terms and conditions contained therein."
The bank attempts to demonstrate that the sanction letter of January 10, 2006 was not a one-time, off-beat transaction and refers to the several other similar letters from the bunch of documents disclosed by the letter of July 21, 2009. Another sanction letter of January 31, 2007 and the telltale indications therein of a lender-borrower transaction is placed to make the point:
"Banking Facilities We, Kotak Mahindra Bank Ltd. 7th floor, Ambadeep, 14 K G Marg, New Delhi - 110 001, India (herein after referred to as 'KMBL') refer to our sanction letter No. CB/100106/1298 dated January 10, 2006 conveyed our sanction for facility sanctioned to Hindustan National Glass & Industries Limited (herein after referred to as 'the borrower'). In continuation and amendment to the above, we are pleased to inform you that the following the facility has now been enhanced and is subject to compliance with conditions stated here under:
Limits INR 10,00,00,000/- (Rupees Ten Crores only) Validity of Facility The Facilities so sanctioned by KMBL to the borrower are revolving in nature and are subject to review that shall be conducted by KMBL and shall at all times be available at the sole discretion of KMBL Other conditions ...
7. This sanction letter issued by KMBL and any further communications of the KMBL from time to time, are to be read along with and is in addition to the terms of the ISDA Master Agreement and the Schedule there under. In case of any inconsistency of the terms in respect of any Credit Support, the contents of this sanction letter shall prevail.
All other terms and conditions of sanction of the facilities sanctioned to you vide our earlier letter no. CB/100106/1298 dated January 10, 2006 shall remain valid, effective, binding and subsisting."
The private bank and the central bank have relied on several circulars issued by the Reserve Bank in their endeavour to establish that in banking parlance a lender-borrower relationship would include the transactions and engagement between the bank and the petitioner company. They suggest that the lender-borrower notion in banking business has to be understood in the context of various circulars issued by the Reserve Bank and, in particular, in the light of the concept of non-performing assets which was introduced nearly 10 years back and has now been refined and redefined.
The Reserve Bank relies on its circular of August 30, 2001 noticed by the Supreme Court in Mardia Chemicals Ltd. v. Union of India [(2004) 4 SCC 311] where a non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained 'past due' for a specified period of time. Over the years the period specified has been reduced in a phased manner. The Reserve Bank says that even its circular of 2001 included, within the definition of NPA, any amount receivable by a bank or financial institution which remained overdue for a period of more than 180 days. The respondent banks suggest that if any "receivable" to a bank could be brought within the definition of NPA, such receivable could also be made the basis for invoking the master circular. The respondent banks have brought several other circulars of the Reserve Bank. A master circular on income recognition, asset classification, provisioning and other related matters issued on July 1, 2008 is placed for the contemporary classification of assets as NPA. The Reserve Bank relies on clause 2.1.2 of such other master circular of July 1, 2008:
"2.1.2 With a view to moving towards international best practices and to ensure greater transparency, '90 days' over due* norms for identification of NPAs have been made applicable from the year ended March 31, 2004. As such, save and except certain relaxations mentioned at para 2.1.3 and 2.1.4 below, with effect from March 31, 2004, a non-performing asset shall be a loan or an advance where:
(i) Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan.
(ii) The account remains 'Out of order' @ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC).
(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
(iv) In the case of direct agricultural advances as listed in Annex 1, the overdue norm specified at para 2.1.5 would be applicable. In respect of agricultural loans, other than those specified in Annex 1, identification of NPAs would be done on the same basis as non- agricultural advances.
(v) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
* Any amount due to the bank under any credit facility, if not paid by the due date fixed by the bank becomes overdue.
@ "An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'".
The Reserve Bank places particular reliance on the fifth limb of the relevant clause. It argues that any amount due to a bank that remains overdue for a period of more than 90 days would become an NPA. The banks say that modern banking business is far removed from the traditional scenario of loans and advances being a bank's foremost area of business. The private bank claims that the terms of the arrangement between the bank and the petitioner company were fluid in concept; they envisaged payment from one party to the other depending on the exchange fluctuations, but also contemplated a system of deferred payment to be availed of by the company subject to the limits specified in individual cases. The bank explains that if the company had made timely payments then a lender-borrower relationship would not have arisen, but in the company availing of the deferred payment facility it became a borrower to the extent of its liability. The bank submits that modern banking is not as rigid as courts would remember it to be: a transaction not carrying a lender-borrower flavour at the inception could later become a borrowal account by the conduct of the customer. This, the bank says, is what happened in the petitioner company's case and is the bank's fundamental basis for viewing the relationship from the lender-borrower standpoint and invoking the master circular.
The bank relies on a Reserve Bank letter of October 13, 2008 circulated to all commercial banks laying down prudential norms for off-balance sheet exposures of banks:
"Prudential Norms for Off-balance Sheet Exposures of Banks Please refer to our circular RBI/2008-09/125. DBOD.No.BP.BC.31/ 21.04.157/2008-09 dated August 8, 2008 on the captioned subject.
2. The issues regarding asset classification status of overdue payments in respect of derivative transactions and re-structuring of derivative contracts have been examined, and it is advised as under:
2.1 2.1 Asset Classification
i) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In that case all other funded facilities granted to the client shall also be classified as non-performing asset following the principle of borrower-wise classification as per the existing asset classification norms.
ii) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft facility from the bank, the receivables mentioned at item (i) above may be debited to that account on due date and the impact of its non-payment would be reflected in the cash credit/overdraft facility account. The principle of borrower-wise asset classification would be applicable here also, as per extant norms.
iii) In cases where the contract provides for settlement of the current mark-to-market value of a derivative contract before its maturity, only the current credit exposure (not the potential future exposure) will be classified as a non-performing asset after an overdue period of 90 days.
iv) As the overdue receivables mentioned above would represent unrealised income already booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken to 'Profit and Loss a/c' should be reversed and held in a 'Suspense a/c' in the same manner as is done in the case of overdue advances."
The bank states that if there ever was any doubt that derivative contracts could not throw up a lender-borrower relationship, it was set at rest by such guidelines of October 13, 2008 which specified that overdue receivables representing positive mark-to-market value of a derivative contract ought to be treated as an NPA if they remained unpaid for 90 days or more. The bank refers to the Reserve Bank clarification on the October 13, 2008 notification by a letter of October 29, 2008 which provides, "Prudential Norms for Off-balance Sheet Exposures of Banks Please refer to our circular DBOD.No.BP.BC.57/21.04.157/2008-09 October 13, 2008 on the captioned subject.
2. In terms of para 2.1(i) of the aforesaid Circular, any receivable representing positive mark-to-market value of a derivative contract, if overdue for a period of 90 days or more, is required to be treated as non- performing asset and also makes all other funded facilities granted to the client as non-performing asset, following the principle of borrower-wise classification.
3. On a review of the matter, it has now been decided to confine the applicability of the principle of borrower-wise asset classification to only the overdues arising from forward contracts and plain vanilla swaps and options. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and is / becomes receivable from the client, should be parked in a separate account maintained in the name of the client / counterparty. This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extent IRAC norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms.
4. These relaxations will also be applicable to the foreign branches of Indian banks. All other instructions contained in the aforesaid Circular of October 13, 2008 remain unchanged."
The respondent banks say that the term "borrower" in the master circular carries the weight of how it is defined in the various enactments relating to banking law. They rely on the definition of borrower in Section 45-A of the Reserve Bank of India Act, 1934. They submit that a bank is permitted to transact in derivatives by virtue of the sanction therefor in Section 45-V of the said Act of 1934. They also rely on the extended definition of borrower in the Credit Information Companies (Regulation) Act, 2005. The relevant statutory provisions may be noticed in such context:
Reserve Bank of India Act, 1934 "45-A. Definitions.--In this Chapter, unless the context otherwise requires,--
(b) "borrower" means any person to whom any credit limit has been sanctioned by any banking company, whether availed of or not, and includes--
(i) in the case of a company or corporation, as subsidiaries;
(ii) in the case of a Hindu undivided family, any member thereof or any firm in which such member is a partner;
(iii) in the case of a firm, any partner thereof or any other firm in which such partner is a partner; and
(iv) in the case of an individual, any firm in which such individual is a partner;"
"45-U. Definitions.--For the purpose of this Chapter,--
(a) "derivative" means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time;
"45-V. Transactions in derivatives.--(1) Notwithstanding anything contained in the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or any other law for the time being in force, transactions in such derivatives, as may be specified by the Bank from time to time, shall be valid, if at least one of the parties to the transaction is the Bank, a scheduled bank, or such other agency falling under the regulatory purview of the Bank under the Act, the Banking Regulation Act, 1949 (10 of 1949), the Foreign Exchange Management Act, 1999 (42 of 1999), or any other Act or instrument having the force of law, as may be specified by the Bank from time to time.
(2) Transactions in such derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of sub-section (1) were in force at all material times."
Credit Information Companies (Regulation) Act, 2005 "2. Definitions.--In this Act, unless the context otherwise requires,--
(b) "borrower" means any person who has been granted loan or any other credit facility by a credit institution and includes a client of a credit institution;
(c) "client" includes--
(i) a guarantor or a person who proposes to give guarantee or security for a borrower of a credit institution; or
(ii) a person--
(A) who has obtained or seeks to obtain financial assistance from a credit institution, by way of loans, advances, hire purchase, leasing facility, letter of credit, guarantee facility, venture capital assistance or by way of credit cards or in any other form or manner;
(B) who has raised or seeks to raise money by issue of security as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or by issue of commercial paper, depository receipt or any other instrument;
(C) whose financial standing has been assessed or is proposed to be assessed by a credit institution or any other person or institution as may, by notification, be directed by the Reserve Bank;"
The bank has also referred to the definition of "debt" in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 but such definition does not appear to be of any relevance in the present discussion.
The company questions the respondent banks' strained logic of enlarging the scope of the lender-borrower principle apparent in the master circular by reference to the other sets of guidelines that have been brought. They say that clause 2.1.2 of the circular on income recognition and related matters specified that an NPA "shall be a loan or an advance" where the other conditions set out in that clause were satisfied. The petitioners criticise the Reserve Bank's reliance on the fifth sub-clause without referring to the governing words found in the first few lines of the clause that qualify all that follows in that provision. The petitioners argue that it is one thing to say that overdue receivables under a derivative contract may amount to an NPA, but quite another to suggest that it would bring about a lender-borrower relationship. In any event, the petitioners say that the range accrual transaction is not a transaction in derivatives.
The petitioners produce extracts from the balance sheet of the private bank for the year 2008-09 that they have downloaded from the bank's website. They say that the notes forming part of the bank's financial statement do not reckon an NPA to include any receivables on account of a derivative transaction. They rely on the bank's understanding of an overdue amount to be an amount due under any credit facility which would imply that non-funded facilities were excluded therefrom. The petitioners rely on the following passages from the notes appended to the bank's most recent annual financial statement:
"Definition and classification of non-performing assets (NPA) The Bank classifies its advances into performing and non-performing advances in accordance with extant RBI guidelines.
A NPA is defined as a loan or an advance where;
• interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan;
• the account remains 'out of order' - in respect of an overdraft/ cash credit (OD/CC); and • the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted."
"Overdue Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank."
"F. Foreign Currency and Derivative Transactions
For the Bank:
...
iv. Derivative transactions comprising of swaps and options are disclosed as off balance sheet exposures. The swaps are segregated into trading or hedge transactions. Trading swaps outstanding as at the Balance Sheet dates are marked to market the resulting profits or losses, are recorded in the Profit and Loss Account. Outstanding derivative transactions designated as "Hedges" are accounted on an accrual basis over the life of the transaction. Option premium paid is accounted for in the Profit and Loss Account on expiry of the option."
"Equity Index/Equity Futures/Equity Index/Equity Options/ Embedded Derivatives:
...
xiii. The marked to market on derivative contracts is determined on a portfolio basis with net unrealised losses being recognised in the profit and loss account. Unrealised gains are not recognised in profit and loss account on grounds of prudence as enunciated in Accounting Standard - 1 (AS-1), Disclosure of Accounting Policies."
The bank retorts that the petitioners have been unkind to it in picking out certain extracts from its financial statement without referring to the bank's treatment of risk exposures in derivatives which has been explained elsewhere in the notes:
"C. Disclosures on risk exposures in derivatives:
...
III. Provisioning, collateral and credit risk mitigation:
Provisioning on derivative receivables is made in accordance with RBI guidelines. The derivative limit sanctioned to clients is part of the overall limit sanctioned post credit appraisal. Collateral is accepted on a case to case basis considering the volatility of the price of the collateral and any increase in operational, legal and liquidity risk."
The bank reasons that any amount due to a bank could be regarded as an asset and as such capable of being classified as an NPA if the amount remained outstanding for such period as stipulated by the Reserve Bank in its guidelines relating to NPA. It relies on the accounting principle referred to in a footnote to the relevant accounting standards (AS-26) in Ramaiya's Guide to the Companies Act (16th Ed.):
"4. A financial asset is any asset that is:
(a) cash;
(b) a contractual right to receive cash or another financial asset from another enterprise;
(c) a contractual right to exchange financial instruments with another enterprise under conditions that are potentially favourable; or
(d) an ownership interest in another enterprise."
The petitioners also reveal their industry in sifting through relevant accounting provisions and the commentaries thereon. They say that a credit facility is quite distinct from any other facility in modern banking practice. The petitioners have 'googled' to obtain some features of the distinction. They refer to Paget's Law of Banking (10th ed.). The petitioners rely on the definition of "credit limit" in P. Ramanatha Aiyar's Advanced Law Lexicon (3rd ed.) appearing at page 1127 of the book:
"Credit limit. The maximum sum that a person or organization is prepared to lend to another."
The petitioners seek to discount the body of banking law and practice cited by the respondent banks on the legal principle that the impugned decision has to sustain itself only by the reasons furnished therein in support thereof and it cannot draw any sustenance from the world of reasons that the order has left out. The petitioners rely on a decision reported at (2005) 12 SCC 508 (Bangalore Development Authority v. R. Hanumaiah) which quotes from Mohinder Singh Gill (supra) at paragraph 56 that held that orders had to stand or fall on the basis of the reasons contained therein and reasons could not be supplemented by later affidavits or further explanation.
The respondent banks say that the extent of assessment in judicial review is limited primarily to looking at the decision-making process and not reappraising the facts or sifting through evidence. They rely on the judgments reported at (1992) Supp 2 SCC 312 (H.B. Gandhi, Excise and Taxation Officer- cum-Assessing Authority, Karnal v. Gopi Nath & Sons); (1997) 3 SCC 72 (Indian Oil Corporation Ltd. v. Ashok Kumar Arora); AIR 1959 SC 942 (Mahant Moti Das v. S.P. Sahi) and (2008) 9 SCC 1 (Shamshad Ahmad v. Tilak Raj Bajaj) in support of such argument. The most recent pronouncement at paragraph 38 of the report in Shamshad Ahmad may be seen:
"38. Though powers of a High Court under Articles 226 and 227 are very wide and extensive over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction, such powers must be exercised within the limits of law. The power is supervisory in nature. The High Court does not act as a court of appeal or a court of error. It can neither review nor reappreciate, nor reweigh the evidence upon which determination of a subordinate court or inferior tribunal purports to be based or to correct errors of fact or even of law and to substitute its own decision for that of the inferior court or tribunal. The powers are required to be exercised most sparingly and only in appropriate cases in order to keep the subordinate courts and inferior tribunals within the limits of law."
The issue has to be addressed as in a demurrer as to the existence and the quantum of debt. If such is the benchmark then there arises no question of assessing facts or appreciating evidence. Just as in a demurrer, the facts here may be assumed as stated qua the bank's claim against the petitioner company. Even if it is accepted that the company has failed to discharge a contractual debt to the bank, the question remains as to whether the bank could invoke the master circular to label the petitioner company as a willful defaulter. There is no doubt that the bank, just as any other creditor, has the inherent right to maintain that the petitioner company has willfully defaulted in not meeting its financial obligation to the bank. But that is also the basis on which every money suit is founded. There is a difference between the bank having a right to its opinion that the company is a willful defaulter and the bank seeking to use the master circular to lend more acceptability to its opinion that the company is a willful defaulter; and inflicting punishment thereby on the company.
The civil consequence that visits a person adjudged to be a willful defaulter under the master circular is serious. It would impinge on the inherent right of a person to carry on business. Even the Reserve Bank is cautious and it advises banks and financial institutions to be judicious in using the master circular. It is imperative then that the class of persons that the master circular seeks to catch in its dragnet is ascertained.
The many other circulars, guidelines and law relied upon by the respondent banks now had not been referred to in the decision of April 7, 2009 of the bank's grievance redressal committee. But it would be naive to suggest that the fact that such other body of material now brought to sustain the decision be disregarded because it had not been specifically referred to at paragraph 10 or thereabouts of the decision. The committee opined that the terms "borrower" and "lender" in the relevant circular "are colloquial in usage and are a subclass of the wider debtor/creditor relationship." It also suggested that "financial facilities sanctioned by a bank and availed by a customer are conveniently referred to as a borrowing by the customer and the customer's account is therefore generally referred to and called a borrowal account." The only statutory provision that the committee relied on was Section 45-A of the Reserve Bank of India Act, 1934.
Clause (b) of Section 45-A defines "borrower" to mean any person to whom a credit limit has been sanctioned by any banking company, whether availed of or not. Certain instances are indicated in the inclusive definition. The fundamental basis of the definition is that a credit limit has to be sanctioned by a banking company to a person for such person to be regarded as a borrower under the said Act. The sanction letters that the bank has relied on here do not speak of any credit limits. They, no doubt, set limits but such limits cannot be regarded as credit limits. The limits in the sanction letters would only show the extent of the transaction that was permitted. Further, in the additional conditions that the bank stipulated, it provided for an undertaking to be furnished by the company "to cash collateralise the negative MTM (over & above the limit of INR 200 Las) every 15 days." That would imply that security was required to be furnished only for the amount by which the negative MTM exceeded the sanctioned limit. It is another matter that no security was sought or furnished even when the negative MTM shot well over the sanctioned limit, but that may not be material for the present purpose. It appears that the limit set in the sanction letters was only to define the range of the transaction and not specify the extent of any borrowing facility accorded by the bank to the company.
The committee's justification has to be read with the appreciation that the few sentences that it expended in dealing with such issue in its decision are backed by years of experience in, and understanding of, banking business. Just as someone legally trained would casually use an expression like res judicata and not care to explain it, taking it for granted that the doctrine would be understood; a banker's opinion on terms used in banking parlance have to be assessed not on the parsimony in expression but on the weight of the underlying body of thought.
Dues in respect of derivative transactions can also be included within the larger basket of NPA; but merely by a virtue of an amount outstanding being regarded as an NPA, it would not make the master circular applicable to the debtor. A debt is certainly an asset and as such it can be brought in within the definition of NPA if it remains unserviced for any length of time. Even otherwise, it is open to the Reserve Bank to specifically include debts due to banks and financial institutions on account of derivative or other transactions within the fold of NPA. But even in the circular on income recognition and related matters of July 1, 2008 that the Reserve Bank has relied on, the essential condition for an account to be treated as an NPA is that it has to be "a loan or an advance." It was only under the circular of October 13, 2008 that derivative transactions were brought into the sweep of NPA accounts; and the other borrowal accounts of the same customer had to be linked such that the entire portfolio of accounts would be NPA. But the subsequent clarification of October 29, 2008 delinked the customer's borrowal accounts from the defaulting derivative transaction account in certain cases.
Under the subject transaction, the bank afforded the petitioner company a period of time - the length of which was pre-determined - to furnish security as cover for the extent of the company's indebtedness to the bank in excess of a limit sanctioned previously. It was possible, depending on foreign exchange rate fluctuations, that the extent of the company's indebtedness to the bank on a given day could stand drastically reduced over the next few days without the company having paid the bank a paisa during the period. The arrangement between the bank and the company allowed a form of deferred payment. But that may not be the same as giving a loan or an advance.
In a sense, the reference to the other circulars may result in a wild goose chase. In theory, Reserve Bank has the authority to stipulate what would qualify as an NPA and what would not; who could be roped in under the master circular as a willful defaulter and who could not. The issue as to the applicability of the master circular to the transaction between the bank and the petitioner company has assumed gravity in the Reserve Bank's endorsement of the bank's use thereof. And it is primarily such master circular that has to be seen as to whether it could reasonably have been read to include a debtor in respect of the subject nature of transaction.
The consideration here is not whether the Reserve Bank could have expressly included derivative contracts or intended to include parties engaged in derivative transactions with banks and financial institutions within the expression of willful defaulter in the circular. The more appropriate query is whether it did. Clause 2.1(a) of the master circular has to be judged by the company it keeps. Sub-clauses (b), (c) and (d) under clause 2.1 inarguably refer to the use of funds and finances relating to credit facilities granted. It would be inappropriate to divorce the opening sub-clause from the others.
Section 45-V of the Reserve Bank of India Act conceives of derivative transactions being entered by one bank or financial institution with another. To read the master circular to imply that it would apply to a party to a contract with a bank regarding derivatives would amount to holding that one bank could label another as a willful defaulter with the attendant consequences that the master circular brings. Whether or not that would be permissible is not a germane consideration now. But it would be adventurous to hold that such a situation can be brought about by the master circular without it specifically covering the same.
There appears to be an error of jurisdiction committed by the bank and its committees in applying the master circular in respect of the bank's claim against the petitioner company. Consequently, the decision of April 7, 2009 is set aside and WP No. 7729 (W) of 2009 is allowed to such extent.
Since there does not appear to be any apparent mala fides on the bank's part except its eagerness to realise what it believes to be its just dues, there will be no order as to costs.
Urgent certified photostat copies of this judgment, if applied for, be supplied to the parties upon compliance with all requisite formalities. (Sanjib Banerjee, J.)