Sikkim High Court
North East Finance Corporation Ltd. And ... vs Union Of India (Uoi) And Ors. on 2 September, 1999
Equivalent citations: AIR 2000 SIKKIM 1, 2000 CLC 46 (SIK)
Author: Anup Deb
Bench: Anup Deb
JUDGMENT Ripusudan Dayal, C.J.
1. By this petition under Article 226 of the Constitution, the petitioners have challenged the order of moratorium made by the Union of India in respect of the Sikkim Bank Limited on March 8, 1999, and also the scheme framed for amalgamating the said bank with the Union Bank of India.
2. Petitioner No. 1, the North East Finance Corporation Ltd., is a company registered under the Registration of Companies Act, Sikkim, 1961, having its registered office in Sikkim and petitioner No. 2, Ashok Dey, is a shareholder and director thereof. Petitioner No. 1 holds 4,02,36,348 equity shares comprising 80 per cent. of the share capital in the Sikkim Bank Limited which carries on the business of banking. Sikkim Bank Limited is also a company registered under the Registration of Companies Act, Sikkim, 1961. Respondent No. 1 is the Union of India through the Secretary, Ministry of Finance, Department of Banking, respondent No. 2 is the Reserve Bank of India, respondents Nos. 3 to 6 are the office-bearers of the Reserve Bank of India, respondent No. 7 is the Sikkim Bank Limited, respondent No. 8 is S.N. Kundu, the managing director having been appointed by the Reserve Bank, and respondents Nos. 9, 10 and 11 are the additional directors of the Sikkim Bank Limited having been appointed by the Reserve Bank. Respondent No. 12, A. Udgata is the Observer, Sikkim Bank Limited having been appointed by the Reserve Bank. Rattan Singh Chowdhury, respondent No. 13 is also a director of Sikkim Bank Limited.
3. Sikkim Bank Limited is an unlicensed and non-scheduled commercial bank having its registered and head office at Gangtok. This bank was incorporated on August 2, 1985, by the name of Sikkim Overseas Corporation Ltd., as a company under the Registration of Companies Act, Sikkim, 1961, with its registered head office at Gangtok. It commenced banking business with effect from July 22, 1987, and its name was changed to Sikkim Bank Limited with effect from October 22, 1987. The Banking Regulation Act, 1949, was extended to Sikkim with effect from December 15, 1987, and, consequently, Sikkim Bank Limited came to be governed under that Act. Consequent thereto, Sikkim Bank Limited applied to the Reserve Bank of India for a licence under Section 22 of the Act. Thereupon, the bank was subjected to periodical inspections by the Reserve Bank. The inspection conducted in the year 1996 revealed that though the financial position of the bank was satisfactory, there were operational deficiencies in its working. Since the size of the bank was small with a capital of Rs. 2.99 crore and very low deposit base and only five branches, it was not considered prudent by the Reserve Bank to issue a licence to it and to include it in the Second Schedule to the Reserve Bank of India Act, 1934. The Reserve Bank advised the Sikkim Bank Limited on February 14, 1997, that on its raising additional capital to the extent of Rs. 39.50 crore by way of rights and preferential issue, the Reserve Bank will issue licence to it for doing banking business under Section 22 of the Act and include the bank's name in the Second Schedule to the Reserve Bank of India Act, 1934. Even though the Sikkim Bank Limited made an offer for an aggregate sum of Rs. 48 crore for subscription on March 27, 1997, the bank could raise its paid-up capital only to the extent of Rs. 15.18 crore from Rs. 2.99 crore. The submission of the Reserve Bank of India is that a sum of Rs. 5.80 crore was brought in by the issue of rights shares by petitioner No. 1 through unauthorised diversion/siphoning off of the bank's funds through various loan accounts which subsequently became non-performing assets. The Additional Chief General Manager of the Reserve Bank, vide his letter dated August 20, 1997 (annexure B to the rejoinder at page 647), communicated to A.M. Mustafi, managing director of the Sikkim Bank Limited that the financial inspection of the bank with reference to its position as on March 31, 1996, revealed deficiencies/shortcomings in certain areas of the bank's functioning and made a request for placing" the same before the board of directors with his comments and proposals for necessary corrective action. A suggestion was also given to initiate action for rectification of the deficiencies in the meantime. The counter-affidavit filed by the Reserve Bank of India states that the inspection of the bank conducted in 1997 revealed that though the financial position of the bank was apparently satisfactory, there were several irregularities in its functioning. The bank was advised in December, 1997, to rectify the irregularities and to bring about substantial improvement in its working by the end of March, 1998. In the meantime, there was some information available that the advances portfolio of the bank was not functioning properly. So, the Reserve Bank conducted a special scrutiny of advances at the Calcutta branch of the bank which is having 90 per cent. of the total advances of the bank, during July, 1998, followed by regular Reserve Bank of India annual inspection with reference to its position as on March 31, 1998. The counter-affidavit further states that the above mentioned special scrutiny and the annual financial inspection of the bank during the year 1997-98 revealed sudden deterioration in the financial position of the bank during 1997-98 and as per the findings of the inspection, the non-performing assets were assessed at Rs. 58.26 crore which formed 95,46 per cent. of its total advances against which there was provision only to the extent of Rs. 1.52 crore and due to short provisioning of Rs. 55.72 crore for its non-performing assets, the bank had incurred a net loss of Rs. 56.22 crore for the year ending March 31, 1998, as against the net loss of Rs. 0.50 crore declared in its audited accounts for that year. Consequently, the deposits of the bank were adversely affected to the extent of 56.62 per cent. of its total deposits as on March 31, 1998, and the net worth of the bank became negative to the extent of Rs. 40.11 crore as against Rs. 3.92 crore as assessed on March 31, 1997. The bank was, therefore, not complying with the requirements of Section 11 (minimum capital) of the Banking Regulation Act. The counter-affidavit further states that it was evident that the affairs of the bank were being conducted in a manner detrimental to the interest of its depositors and the bank was also not complying with the provisions of Section 22(3)(a) and (b) of the Act. With a view to safeguarding the depositors' interest, the bank was advised on August 1, 1998, not to increase its level of advances further and also to deposit its statutory liquidity ratio securities with the Reserve Bank. The Reserve Bank issued a notice dated September 30, 1998, to the Sikkim Bank Limited calling upon it to show cause within a period of three weeks from the date of the receipt of the notice as to why the bank's application for grant of licence should not be rejected. The bank furnished its reply on October 24, 1998, which the Reserve Bank found to be highly unsatisfactory. The affidavit of the Reserve Bank further states that in view of the grave financial ill-health of the Sikkim Bank Limited brought about entirely by the then management, the immediate task before the Reserve Bank was to revamp the existing management of the bank in order to avoid further deterioration in its financial position. Keeping this in view, the Reserve Bank removed the then managing director, A.M. Mustafi, in January, 1999, by issuing a show-cause notice and also after giving him an opportunity for representation/hearing, in exercise of powers conferred under Section 36AA of the Act, appointed S.N. Kundu, a senior officer of the Bank of Baroda on deputation as the new managing director under Section 10BB of the Act and also appointed three additional directors on the bank's board under Section 36AB of the Act. The counter-affidavit further states that in order to assess the financial position of the bank as on December 31, 1998, the Reserve Bank arranged for a special financial audit of the bank in January, 1999, by L.B. Jha and Co. an independent firm of chartered accountants, under Section 30(1B) of the Act and the findings of the special audit corroborated the findings of the Reserve Bank's inspection with reference to its position as on March 31, 1998, and revealed that there was large scale siphoning off of funds to the tune of Rs. 57.50 crore through "connected lendings" to the business establishment of two of the directors of the bank. Sikkim Bank Limited had purchased high value local cheques from various parties during January, 1996, and June, 1997, and the proceeds of these cheques were credited to the current accounts opened in the names of these parties. Subsequently, the proceeds of these local cheques purchased were transferred, either directly or through various conduit accounts, to Vinod Baid and Co. and Prudential Group of Companies in which Baid, then director of the bank held controlling interests and Asia Pacific Group Companies and North East Finance Corporation in which the director R.S. Chowdhury is connected. The local cheques purchased were not presented for clearing, in violation of the normal banking practice, and in order to extinguish the liabilities arising out of these cheques purchased by the bank, various credit facilities, viz., cash credit limits (Rs. 37.40 crore), bills discounted (Rs. 15.30 crore) demand loans (Rs. 4.80 crore) were sanctioned by the credit committee of the bank and ratified by the board of which the above mentioned directors were members. It was further revealed that the Sikkim Bank Limited did not have any security either primary or collateral for any of these advances and in case of cash credit limits, many of the companies were non-existent. All the bills discounted by the bank were for accommodation purposes and clean in nature. The shares taken as collateral for demand loans were of nondescript companies having no market value. Thus the board and top management of the bank facilitated the siphoning off of funds to provide accommodation to front companies of particular group concerns. Thus, according to the Reserve Bank, even though in 1997 the financial position of the banking company apparently appeared to be satisfactory, in reality, it was not so. The Reserve Bank has stated that the connected lendings which were not backed by any security resulted in NPAs being as high as 96 per cent. of the total advances of the bank and the prospects of recovery of these advances were quite bleak. The counter-affidavit further states that the net loss of the bank is estimated to be Rs. 66.06 crore for the year 1998-99 and thus the net worth of the Sikkim Bank Limited as on March 31, 1999, is computed to be (--) Rs. 50.43 crore as against (--) Rs. 40.11 crore as on March 31, 1998. Consequently, there is erosion in the Sikkim Bank's deposits which stood at Rs. 62.41 crore as on March 31, 1998, to the extent of 80.8 per cent as on that date. On February 12, 1999, Kundu, the managing director of Sikkim Bank addressed a letter to the Chief General Manager, Reserve Bank of India, giving details of the malfunctioning of the bank. He suggested appropriate disciplinary action against certain top executives of the bank for wrong credit decisions and gross mismanagement of funds and clearly stated that the bank would not be able to meet its deposit liabilities after March, 1999, and would have to close its doors unless fresh funds of substantial amount were forthcoming. He further stated that the bank's image in the eyes of the public was such that it might not be able to mobilise fresh bulk deposits, and recovery of non-performing assets for a substantial amount did not seem feasible and if the bank was to survive as a separate entity, the only option was to arrange for infusion of fresh capital to the tune of at least Rs. 30 crore. He requested the addressee to persuade a reliable promoter to take over the bank by pumping in fresh capital and said that it was essential that the entire process of takeover and infusion of fresh capital was completed by March, 1999. The letter further stated that in case a suitable buyer could not be located within a month, no alternative would be left but to merge the bank with a public sector bank, as no private sector bank would be prepared to shoulder the burden of such a high volume of non-performing assets. On March 6, 1999, S.N. Kundu, addressed another letter to the Deputy Governor, Reserve Bank of India, to the effect that on March 8, 1999, the bank's liquid funds would be reduced to about Rs. 190 lakhs and a minimum of Rs. 3 crore was required for the smooth maintenance of clearing operations at all branches and so the bank was not in a position to repay the fixed deposits without creating overdraft in its current account with the Reserve Bank of India which is strictly prohibited. The counter-affidavit of the Reserve Bank further states that the cumulative effect of all these aspects called for immediate action on the part of the Reserve Bank under Section 45 of the Act. On March 8, 1999, the Reserve Bank made an application to the Central Government for imposing a moratorium on the Sikkim Bank Limited with immediate effect, that is, from the close of business as of March 8, 1999, in order to avoid a run on the bank. On the same date, a notification was issued by the Central Government under Section 45(2) of the Act ordering a moratorium for the period from the close of business on March 8, 1999, up to and inclusive of June 5, 1999. Subsequently, the period of moratorium was extended up to September 3, 1999. On May 28, 1999, a public notice was published by the Reserve Bank of India, Department of Banking Operations and Development to the following effect :
"DEPARTMENT OF BANKING OPERATIONS AND DEVELOPMENT NOTICE It is hereby notified that on the application of the Reserve Bank of India under Sub-section (1) of Section 45 of the Banking Regulation Act, 1949, the Central Government has made an order of moratorium in respect of the Sikkim Bank Ltd., under Sub-section (2) of the said Section with effect from the close of business on March 8, 1999, to June 5, 1999, (inclusive). The Central Government has also issued directions to the said banking company under Clause (3) thereof authorising payment of certain liabilities and obligations. In order to effect an amalgamation of the Sikkim Bank Ltd. with Union Bank of India, the Reserve Bank of India, in exercise of the powers conferred on it by Sub-section (4) of the said section, has prepared a scheme and forwarded it, in draft, to each of the aforesaid banking companies for suggestions and objections, if any, in terms of Clause (a) of Sub-section (6) of the said section, within a period of two weeks from the receipt of the draft scheme. Copies of the draft scheme can be obtained from the aforesaid two banking companies by any of their members, depositors or creditors. If any member, depositor or creditor of the Sikkim Bank Ltd. or Union Bank of India has any suggestions or objections with regard to the draft scheme, he may, within a period of two weeks from the date of the publication of this notice, send his suggestions or objections to the Chief General Manager, Department of Banking, Operations and Development, Reserve Bank of India, Central Office, World Trade Centre, Centre-1, Cuffe Parade, Colaba, Mumbai-400 005 for consideration under Clause (b) of Sub-section (6) of Section 45 of the said. Act.
Date : 28th May, 1999."
4. On June 9, 1999, petitioner No. 1 filed objections with the Reserve Bank against the scheme and also the declaration of moratorium and made a request for personal hearing before proceeding further in the matter of the scheme and taking any final decision thereon. On June 15, 1999, the Reserve Bank sent a communication to the director of petitioner No. 1 stating that it had been decided to give him a personal hearing as per the request made and asked him to call on Khizer Ahmed, the executive director of the Reserve Bank, at 11 a.m. on June 21, 1999. On June 17, 1999, petitioner No. 1 replied that the notice for personal hearing had been received only on that date and the time given was too short and it would be well-nigh impossible for the petitioners to attend to him for hearing with their lawyer. A request was made for refixing the date of hearing with at least two weeks' time, to represent their case. It was further stated that Khizer Ahmed, the executive director of the Reserve Bank was biased against the Sikkim Bank Limited and, therefore, it was apprehended that the petitioners would not get a real hearing and consideration of their submissions.
5. The petitioners have pleaded in their petition filed on June 21, 1999, that though the Banking Regulation Act, 1949, has been extended to Sikkim with effect from December 15, 1987, the Companies Act has not been so extended and, therefore, the Banking Regulation Act is not workable. It is further pleaded that Sikkim Bank Limited is not a banking company as defined by Section 5(c) of the Banking Regulation Act and as such, the Banking Regulation Act does not apply to Sikkim Bank Limited. Further, it is stated that after the Banking Regulation Act was extended to Sikkim, Sikkim Bank Limited made an application before the Reserve Bank of India in the year 1988, for a licence under Section 22 of the Banking Regulation Act, but that application was not processed by the Reserve Bank on one pretext or the other, even though the financial condition of the bank, the general character of its management, the adequacy of its capital structure and earning prospects were in favour of the bank and that the bank complied with all the necessary stipulations and took all necessary steps required to be taken by it and followed all the rules and the guidelines of the Reserve Bank. Further, the petitioners have pleaded that the performance of the Sikkim Bank Limited was satisfactory prior to the appointment of three additional directors and one observer in December, 1988, and the managing director in January, 1999, by the Reserve Bank and the condition of the bank deteriorated on account of these officers and it is their handiwork that a situation for making an order of moratorium came into existence. It is also pleaded that the provisions of the Banking Regulation Act are arbitrary and the exercise of power under Section 45 by the Reserve Bank as also by the Central Government is arbitrary. It is further stated that since the order of moratorium has already been made in respect of Sikkim Bank Limited and a purported scheme has been framed to amalgamate that bank with the Union Bank of India, no useful purpose would be served by demanding justice from the respondents even though the order of moratorium, as also the scheme, is bad in law. A number of reliefs have been claimed in the petition, but at the time of arguments, the reliefs have been restricted only with respect to moratorium and the scheme framed under Section 45 of the Banking Regulation Act.
6. One counter-affidavit has been filed by respondent No. 1 and another by respondents Nos. 2 to 6. A counter has also been filed on behalf of respondents Nos. 7 and 8. One other counter-affidavit has been filed by Partha Mukherjee who sought to represent the Sikkim Bank Limited. On July 26, 1999, we noticed that two advocates, namely, A. Moulik authorised by Rajen Lama, chief manager of the Sikkim Bank Limited, and R.B. Subba authorised by R.S. Chowdhury, a director of the bank, sought to represent the bank by filing two vakalatnamas. On that date, we directed that the persons who had authorised the respective advocates would file affidavits annexing therewith relevant documents including a copy of the resolution of the board of directors by July 30, 1999, and then the question as to who was authorised to represent the bank, respondent No. 7, would be considered on August 16, 1999. It was further observed that R.S. Chowdhury, Rajen Lama and S.N. Kundu should be personally present in the court on August 16, 1999. No affidavit was filed pursuant to the order dated July 26, 1999, by R.S. Chowdhury. Affidavit was filed by Rajen Lama on July 30, 1999, annexing three documents. These documents along with some other documents filed on August 17, 1999, showed that S.N. Kundu, the managing director, had the authority to authorise A. Moulik, advocate to represent the bank. Since R.S. Chowdhury did not comply with our orders passed on July 26, 1999, we did not permit him to represent the bank. Accordingly, we permitted A. Moulik to represent the bank. At the same time, we permitted R.S. Chowdhury to represent his case but not on behalf of the bank.
7. The affidavit filed by Partha Mukherjee supports the petitioners. The counter-affidavits filed by respondents Nos. 1 to 8 deny the allegations made by the petitioners. These respondents have pleaded that Sikkim Bank Limited is a banking company within the meaning of the Banking Regulation Act, 1949, and the Banking Regulation Act has been properly extended to Sikkim under Clause (n) of Article 371F of the Constitution. They have also alleged that the Sikkim Bank Limited had indulged in several irregularities, violating the provisions of the Banking Regulation Act and also the guidelines of the Reserve Bank and the bank failed to make any substantial improvement despite having been asked to do so. Some of the averments made by the Reserve Bank in their counter-affidavit have already been referred to and need not be repeated again. The most serious objection taken by the Reserve Bank is that the bank did not have any security, either primary or collateral for any of the advances granted by it and in case of cash credit limits, many of the companies were non-existent and all the bills discounted by the bank were for accommodation purposes and clean in nature. Further, the shares taken as collateral for demand loans were of nondescript companies having no market value and the board and the top management of the company had siphoned off funds to provide accommodation to front companies of particular groups and the net worth of the bank was negative. It is the case of these respondents that the order of moratorium was necessary to protect the interest of the depositors and also of the banking company and also public interest and the scheme framed by the Reserve Bank under Section 45(4) is also valid. It is their case that all the decisions taken by the Reserve Bank including the removal of the former managing director and the appointment of the managing director, the additional directors and the observer were directed to achieve a public purpose and to fulfil the duties imposed by law after giving due consideration to the material on record in the context of the factual situation.
8. The submissions made by Shri Pal, learned counsel for the petitioners, supported by Chatterjee may be summarised as under :
1. The Banking Regulation Act has been extended to Sikkim by a presidential notification under Clause (n) of Article 371F of the Constitution but Clause (n) permits only a State law to be extended to Sikkim and not a Central law and so the aforesaid Act has not been validly extended to Sikkim.
2. Section 45 of the Banking Regulation Act is applicable to a banking company which must necessarily be a company. Under Section 5(d) of the aforesaid Act "company" means any company as defined in Section 3 of the Companies Act, 1956, including a foreign company within the meaning of Section 591 of that Act and Sikkim Bank Limited being a company registered under the Registration of Companies Act, Sikkim, 1961 is not a company within the meaning of Section 5(d) of the Banking Regulation Act since the Registration of Companies Act, Sikkim, 1961 is not a law corresponding to the Companies Act and thus even if the Banking Regulation Act has been validly extended to Sikkim, the Act does not apply to Sikkim Bank Limited.
3. Section 45 of the Banking Regulation Act is not constitutionally valid, since it confers unguided discretion to choose between the procedure and provisions of Section 45 on the one hand and the provisions of Section 36AE to Section 36AG of that Act on the other. Further, an unguided discretion has been conferred on the Reserve Bank of India to choose between reconstruction and amalgamation in Section 45(4). Besides, Section 45 is more onerous than Sections 36AE to 36AG, both in procedure and substance.
4. There was no proper application under Section 45(1) of the Banking Regulation Act before the Central Government and there was no consideration on the part of the Central Government of such application before passing the order of moratorium under Section 45(2).
5. The letter dated June 15, 1999, of the Reserve Bank of India purporting to give an opportunity of personal hearing to the petitioners is invalid, since it purported to bring within its scope hearing on the issue of moratorium which hearing could be given only by the Central Government and also because opportunity of hearing was given before Khizer Ahmed who was biased against the petitioners.
6. The action is bad on account of mala fides on the part of the officers of the Reserve Bank.
Now, we take up these points serially.
Point No. 1:
9. Sikkim became an integral part of the Indian Union as a full-fledged State by virtue of the Constitution (Thirty-sixth Amendment) Act, 1975, whereby, Article 371F was inserted. The Banking Regulation Act, 1949, along with two other Acts was extended to Sikkim, vide notification dated January 15, 1976, made by the President of India in exercise of the powers conferred by Clause (n) of Article 371F of the Constitution which reads as under :
"The Gazette of India, Extraordinary, Part II Section 3, Sub-section (ii), Ministry of Home Affairs, Notification, New Delhi, the 15th January, 1976.
The following notification made by the President on the 15th January, 1976, is published for general information ;
S. O. 42(E).--In exercise of the powers conferred by Clause (n) of Article 371F of the Constitution, the President hereby extends to the State of Sikkim the enactments specified in the schedule annexed hereto subject to the modification if any, specified in that schedule and the following further modification, namely :--
(1) Any reference in the said enactments to a law not in force, or to a functionary not in existence, in the State of Sikkim shall be construed as a reference to the corresponding law in force or to the corresponding functionary in existence, in that State :
Provided that if any question arises as to who such corresponding functionary is or if there is no such corresponding functionary, the Central Government shall decide as to who such functionary will be and the decision of the Central Government shall be final.
(2) Notwithstanding anything contained in the relevant provision, if any, of each such enactment for the commencement thereof, the provisions of each such enactment shall come into force in the State of Sikkim on such date as the Central Government may, by notification in the Official Gazette appoint :
Provided that different dates may be appointed for different provisions of any enactment and for different area in the State of Sikkim and any reference in any such provision to the commencement of the Act shall be construed as a reference to the coming into force of that provision in the area where it has been brought into force.
THE SCHEDULE Year No. Short title Modification 1881 26 The Negotiable Instruments Act, 1881 1949 10 The Banking Regulation Act. 1949 1955 23 The State Bank of India Act, 1955 F.A. Ahmed, President.
[No. S-12014/3/75-SR Voll]."
10. By a subsequent notification dated December 11, 1987, issued by the Ministry of Finance, Department of Economic Affairs (Banking Division), Government of India, in pursuance of paragraph (2) of the notification dated January 15, 1976, the Government appointed "the December 15, 1987, as the date on which the provisions of the Banking Regulation Act, 1949 (10 of 1949), shall come into force in the State of Sikkim". Thus the Banking Regulation Act was extended to Sikkim and came into force with effect from December 15, 1987, on account of the notification issued by the President of India in exercise of the powers conferred by Clause (n) of Article 371F of the Constitution. Clause (n) of Article 371F provides as under :
"371F. Special provisions with respect to the State of Sikkim.--Notwithstanding anything in this Constitution,-- .... .
(n) the President may, by public notification, extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of the notification."
11. The submission of Pal is that Clause (n) of Article 371F permits only a State law to be extended to Sikkim and not a Central law and seeks support from Article 143, Constitution of India, In re, AIR 1951 SC 332 ; Mithan Lal v. State of Delhi, AIR 1958 SC 682 ; Smt. Marchi v. Mathu Ram, AIR 1969 Delhi 267. On the other hand, Bhatt appearing on behalf of the Union of India and the Reserve Bank, has submitted that a plain reading of Clause (n) makes it manifest that it permits both the Central law and the State law to be extended and the authorities cited by Pal have no application in support of the submissions made by him.
12. A plain reading of Clause (n) would make it clear that by this provision, the President is empowered to extend to Sikkim with such restrictions or modifications as he thinks fit "any enactment which is in force in a State in India at the date of the notification". What is necessary for a law to be extended under Clause (n) is that that law should be in force in any State in India. It does not specifically say whether that law is to be Central law or a State law. Therefore, it would cover both a State law and a Central law.
13. The political developments and historical background which led to the merger of Sikkim into India would also show that Clause (n) could not be intended to be restricted to a law which was enacted by the Legislature of any other State. The merger was based on certain solemn assurances given to the people of Sikkim. The laws which were in force immediately before the merger were enacted at a time when Sikkim was under the Chogyal's rule. It was intended that those laws would continue to be in force in Sikkim until amended or repealed by a competent Legislature or other competent authority, even if those laws were not in accord with other provisions of the Constitution. This was so provided by Clause (k) of Article 371F. This was the position with respect to the State laws. As regards the Central laws, it was not intended that on merger all the Central laws would become automatically applicable to Sikkim. The transition was intended to be smooth and gradual so that the merger did not give a sudden and severe jolt to the establishment. The Central laws which were to be enacted after the merger would automatically be applicable to Sikkim because at that time Sikkim would be a part of India, and being part of India all laws which will be intended to apply to India would automatically apply to Sikkim. As regards the Central laws which were enacted prior to the merger, Parliament has, undoubtedly, the power to extend such laws to Sikkim. At the same time, further provision was made under Clause (n) empowering the President of India to extend such laws as he might think fit to apply to the State of Sikkim, as were in force at the time of the notification in any State of India. We may take judicial notice of the fact that in the past, Central laws were extended to Sikkim with the consent of the State Government. Those Central laws were extended to Sikkim when the need for such laws was felt both by the State Government and the Central Government. There seems to be no logic in the contention that the President was empowered to extend only those laws which were enacted by a State Legislature. On the contrary, it would appear that the intention was to provide for the extension of Central laws which were in force prior to the date of the merger and, while being so, the power was not restricted to the Central laws but was worded in so extensive terms as to cover the laws passed by the State Legislatures also. Further, if the intention were to restrict the power of extension only to a law enacted by any other State Legislature, it is difficult to appreciate why the power of extension should not have been given to the Governor of Sikkim, instead of the President.
14. None of the authorities cited by Pal supports the submission made by him. In none of these authorities, the question arose whether the expression "in force in a State in India" covered or excluded a law passed by Parliament. Article 143, Constitution of India, In re, AIR 1951 SC 332, the third question referred under Article 143 of the Constitution for opinion of the Supreme Court was as under (page 335) :
"3. Is Section 2 of the Part C States (Laws) Act, 1950, or any of the provisions thereof and in what particular or particulars or to what extent 'ultra vires' the Parliament ?
Section 2 of the Part C States (Laws) Act, 1950, runs as follows :
'Power to extend enactments to certain Part C States.--The Central Government may, by notification in the Official Gazette, extend to any Part C State (other than Coorg and the Andaman and Nicobar Islands) or to any part of such State, with such restrictions and modifications as it thinks fit, any enactment which is in force in a Part A State at the date of the notification and provision may be made in any enactment so extended for the repeal or amendment of any corresponding law (other than a Central Act) which is for the time being applicable to that Part C State'."
15. Shri Pal seeks to derive support from the following observations (page 362) :
"(95) The Central Legislature, which enacted these provisions, had, at all material times, the power to make laws itself for the designated territories. But, instead of exercising that power, it empowered the Provincial Government in the first-mentioned case and the Central Government in the others to extend, by notification in the Official Gazette, to the designated territories laws made by Provincial Legislatures all over India for territories within their respective jurisdiction."
16. Shri Pal has submitted that the words italicised by us, viz., "made by Provincial Legislatures" mean that the Supreme Court interpreted the words "in force in a Part A State" as meaning the laws made by Provincial Legislatures. However, we are unable to persuade ourselves to accept such construction. The Supreme Court was dealing with the power of delegation admittedly in relation to the laws made by Provincial Legislatures and it was in this context that the court used the expression which has been relied upon by Pal. Their Lordships did not lay down law that the expression "in force in a Part A State at the date of the notification" meant a law made by a Provincial Legislature and did not include a law made by the Central Legislature. Similar comments would apply to the other two authorities cited by learned counsel.
17. We, therefore, hold that the power of the President to extend laws under Clause (n) of Article 371F extends to all laws which were in force in any State in India whether they were enacted by Parliament or by the Legislature of any other State.
Point No. 2;
18. As stated earlier, the Banking Regulation Act, 1949, along with two other Acts was extended to Sikkim vide notification dated January 15, 1976, issued by the President of India in exercise of the powers conferred by Clause (n) of Article 371F of the Constitution, subject to the modification, if any, specified in the schedule to the notification and the further modification which is reproduced as under :
"(1) Any reference in the said enactments to a law not in force, or to a functionary not in existence, in the State of Sikkim shall be construed as a reference to the corresponding law in force or to the corresponding functionary in existence, in that State."
19. Most of the provisions of the Banking Regulation Act, 1949, apply to a banking company. "Banking company" is defined by Section 5(c) of the Banking Regulation Act, 1949, as meaning "any company which transacts the business of banking in India". "Company" is defined by Section 5(d) as meaning "any company as defined in Section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the meaning of Section 591 of that Act". The Companies Act, 1956, has not been extended to Sikkim and as such the meaning of "company" is to be ascertained with reference to the corresponding law in force in the State of Sikkim in terms of the notification dated January 15, 1976. The corresponding law in force in Sikkim cannot be other than the Registration of Companies Act, Sikkim, 1961, under which the Sikkim Bank Limited was incorporated. It would thus appear that the Sikkim Bank Limited is a company under the Registration of Companies Act, Sikkim, 1961, which is a law corresponding to the Companies Act, 1956. As such, Sikkim Bank Limited which carries on the business of banking is a banking company to which the Banking Regulation Act, 1949, applies.
20. It is, however, submitted on behalf of the petitioners that the Registration of Companies Act, Sikkim, 1961, does not correspond to the Companies Act, 1956, inasmuch as the Companies Act, 1956, is a comprehensive legislation dealing with the control of management, finance, winding up and dissolution, etc., of companies, regarding which there are no provisions in the Registration of Companies Act, Sikkim, 1961. On the other hand, Bhatt has submitted that since the Registration of Companies Act, Sikkim, 1961, is the only law in force in Sikkim, that is the corresponding law in force in Sikkim.
21. The Supreme Court held in E.V. Mathal v. Subordinate Judge [1969J 2 SCC 194 ; AIR 1970 SC 337, 339, that "to correspond means to 'be in harmony with or be similar, analogous to'. It does not mean to 'be identical with'. In Jagir Singh v. Ranbir Singh [1979] 1 SCC 560 ; AIR 1979 SC 381", the Supreme Court observed :
"In the Shorter Oxford English Dictionary, Third Edition, Volume I, the word 'correspond' is said to mean '(1) to answer to something else in the way of fitness; to agree with ; be conformable to ; be congruous or in harmony with, (2) To answer to in character or function ; to be similar to'. In Butterworth's 'Words and Phrases--Legally Defined', Second Edition, Volume I, it is said 'to correspond', does not usually, or properly, mean 'to be identical with', but 'to harmonise with', or 'to be suitable to' and reference is made to Sackville-West v. Holmesdale (Viscount)[1870] 4 HL 543. We are, therefore, of the view that Section 125 of the new Code corresponds to Section 488 of the old Code notwithstanding the fact that under the new Code a child who has attained majority and who does not suffer from any infirmity is not entitled to be maintained by the father."
22. In order that the Registration of Companies Act, Sikkim, 1961, should correspond to the Companies Act, 1956, it is not necessary, nor is it possible, that the two laws should be identical with each other or that the Sikkim Act should have made provisions on all matters on which the Central law has provided. It is enough that they are in harmony with each other, and harmony is to be seen in relation to the relevant context, which is the extension of the Banking Regulation Act to Sikkim and its application to banking companies in Sikkim. In that context, the provisions regarding incorporation and registration of a company are relevant. The Companies Act, 1956, and also the Registration of Companies Act, 1961, both provide for incorporation and registration of companies. Under the provisions of both, on the registration of a company, a new entity, known in legal parlance, an artificial person comes into being. To this extent both the laws are in harmony with each other, though they are not identical. The fact that there are no provisions regarding the control of management, finances, winding up and dissolution, etc., in the Registration of Companies Act, Sikkim, 1961, does not detract from the legal position that that Act is the corresponding law in Sikkim on the subject of incorporation and registration of a company.
23. That the Sikkim Bank Limited is a company within the meaning of Section 5(d) and a banking company within the meaning of Section 5(c) of the Banking Regulation Act, and the Banking Regulation Act has been validly extended to Sikkim has been accepted by all concerned as a fact as all have acted in the past taking that factual state to be true. It is an undisputed fact that the Sikkim Bank Limited made an application to the Reserve Bank of India under Section 22 of the Banking Regulation Act for a licence and thereafter, the Sikkim Bank Limited continued to press that application and the Reserve Bank continued to consider it. On September 30, 1998, the Reserve Bank issued a notice to the Sikkim Bank Limited to show cause why its application for grant of licence should not be rejected, since the Reserve Bank was, prima facie, of the opinion that the affairs of the bank had been and were being conducted in a manner detrimental to the interest of the depositors and the bank did not satisfy the conditions contained in Section 22(3) of the Banking Regulation Act. Reply to that notice was sent by the Sikkim Bank Limited to the Reserve Bank on October 24, 1998. The Sikkim Bank Limited also made several applications for opening its branches at different places and the Reserve Bank acting thereupon, granted licences under Section 23 of the Banking Regulation Act. Thus the interpretation placed by us is in accord with the position accepted by the parties, until the filing of the present writ petition on June 21, 1999.
24. Thus Sikkim Bank Limited, having been registered under the Registration of Companies Act, Sikkim, 1961, is a company within the meaning of Section 5(d) of the Banking Regulation Act by virtue of the modification with which the Banking Regulation Act, 1949, was extended and is also a banking company within the meaning of Section 5(c) of that Act and that Act applies to this company.
Point No. 3:
25. Shri Pal has submitted that the Central Government has the power to acquire the undertakings of banking companies under the provisions of Sections 36AE, 56AF and 36AG on the existence of almost the same situation in which the Central Government has the power to order moratorium under Section 45 and even under Section 45, the discretion is to choose between reconstruction and amalgamation as provided in Section 45(4) and the discretion is unfettered and unguided and Section 45 is more onerous than Sections 36AE, 36AF and 36AG both in procedure and substance and, therefore, Section 45 is unconstitutional, being infected with the vice of arbitrariness.
26. Sections 36AE, 36AF and 36AG occur in Part IIC of the Banking Regulation Act and deal with the acquisition of the undertakings of banking companies in certain cases. Section 36AE(1), in so far as it is material, provides that if, upon receipt of a report from the Reserve Bank, the Central Government is satisfied that a banking company :
(a) has, on more than one occasion, failed to comply with the directions given to it in writing under Section 21 or Section 35A, in so far as such directions relate to banking policy, or
(b) is being managed in a manner detrimental to the interests of its depositors,--
and that-
(i) in the interests of the depositors of such banking company, or
(ii) in the interests of banking policy, or
(iii) for the better provision of credit generally or of credit to any particular section of the community or in any particular area,
27. It is necessary to acquire the undertaking of such banking company, the Central Government may, after such consultation with the Reserve Bank as it thinks fit by notified order, acquire the undertaking of such company with effect from such date as may be specified in this behalf by the Central Government. The proviso to Sub-section (1) provides that no undertaking of any banking company shall be so acquired unless such banking company has been given a reasonable opportunity of showing cause against the proposed action. Pal has submitted that whereas under Section 36AE, a prior reasonable opportunity of showing cause against the proposed action is contemplated, Section 45 only contemplates a post-decisional opportunity and this is one factor which makes Section 45 onerous. Section 36AF(1) provides that the Central Government may, after consultation with the Reserve Bank, make a scheme for carrying out the purposes of Part IIC. Clause (e) of Sub-section (2) of that section, inter alia, says that such scheme may provide for the manner of payment of the compensation payable in accordance with the provisions of Part IIC to the shareholders of the acquired bank. Section 36AG(1), inter alia, stipulates that every person who, immediately before the appointed day, is registered as a holder of shares in the acquired bank, shall be given by the Central Government, such compensation in respect of the transfer of the undertaking of the acquired bank as is determined in accordance with the principles contained in the Fifth Schedule. Sub-section (3) of that section provides that the amount of compensation to be given in accordance with the principles contained in the Fifth Schedule shall be determined in the first instance by the Central Government in consultation with the Reserve Bank, and shall be offered by it to all those to whom compensation is payable under Sub-section (1) in full satisfaction thereof. Sub-section (4) says that if the amount of compensation offered in terms of Sub-section (3) is not acceptable to any person to whom the compensation is payable, such person may, before such date as may be notified by the Central Government in the Official Gazette, request the Central Government in writing to have the matter referred to the Tribunal constituted under Section 36AH. Pal has submitted that the provision which enables a shareholder to carry the dispute about the amount of compensation to a Tribunal is more beneficial to a shareholder than the provisions contained in Section 45. Para. I of Schedule V provides that the compensation to be given under Section 36AG shall be an amount equal to the value of the assets of the acquired bank less the total amount of liabilities thereof computed in accordance with the provisions of the Schedule. Para. 3 of Schedule V says that every shareholder of the acquired bank to whom the compensation is payable shall be given such amount as" compensation as bears to the total compensation, calculated in accordance with the provisions of paragraph 1, the same proportion as the amount of paid-up capital of the shares held by the shareholder bears to the total paid-up capital of the acquired bank. This means that if the value of the assets is less than the total amount of liabilities, the amount of compensation shall be nil.
28. On the other hand, Section 45 provides for an order of moratorium by the Central Government on the application of the Reserve Bank staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as the Central Government thinks fit and proper and the Central Government may from time to time extend the period so however that the total period of moratorium shall not exceed six months. During the period of moratorium, the Reserve Bank may prepare a scheme (i) for the reconstruction of the banking company, or (ii) for the amalgamation of the banking company with any other banking institution, if the Reserve Bank is satisfied that it is necessary to do so (a) in the public interest ; or (b) in the interests of the depositors ; or (c) in order to secure the proper management of the banking company ; or (d) in the interest of the banking system of the country as a whole. This scheme may, inter alia, under Clause (b) of Sub-section (5) provide in the case of amalgamation of the banking company, the transfer to the transferee-bank of the business, properties, assets and liabilities of the banking company on such terms and conditions as may be specified in the scheme. It may also provide under Clause (f) of Sub-section (5) for the reduction of the interest or rights which the members, depositors and other creditors have in or against the banking company before its reconstruction or amalgamation to such extent as the Reserve Bank considers necessary in the public interest or in the interests of the members, depositors and other creditors or for maintenance of the business of the banking company. It may also provide under Clause (h) for the allotment to the members of the banking company for shares held by them therein before reconstruction or amalgamation whether their interest in such shares has been reduced under Clause (f) or not, of shares in the banking company on its reconstruction or, as the case may be, in the transferee-bank and where any members claim payment in cash and not allotment of shares, or where it is not possible to allot shares to any members, the payment of cash to those members in full satisfaction of their claim,--
(i) in respect of their interest in shares in the banking company before its reconstruction or amalgamation ; or
(ii) where such interest has been reduced under Clause (f), in respect of their interests in shares as so reduced.
29. After noticing the relevant provisions of Part IIC and Section 45 which were referred to by learned counsel for the petitioners in order to persuade us to accept his submission that Section 45 is more onerous than the provisions of Part IIC, we find ourselves unable to agree with the submission. It is difficult to hold that reconstruction or amalgamation contemplated under Section 45 is more onerous than acquisition. As held by the Supreme Court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962] 32 Comp Cas 514 ; AIR 1962 SC 1371, an examination of the Banking Regulation Act reveals two things prominently. The first is that the whole intent and purpose of that Act is to secure the interests of the depositors and the second is that the Reserve Bank is the instrumentality by which this intent is to be achieved. The Act, at every turn makes the Reserve Bank the authority to sanction, permit, certify, inspect, report, advise, control, direct, license and prohibit. There is hardly any provision where the Reserve Bank's judgment is not made final vis-a-vis a banking" company. The Reserve Bank has been created as a central bank with powers of supervision, advice and inspection over banks, particularly, those desiring that they be included in the Second Schedule or those scheduled already. The Reserve Bank safeguards the economy and financial stability of the country. The most important function of the Reserve Bank is to regulate the banking system generally. The Reserve Bank has been described as the bankers' bank. The Reserve Bank has also been given certain advisory and regulatory functions. The Reserve Bank operates the currency and credit system of the country to its advantage. The Reserve Bank possesses all the necessary information. The position of the Reserve Bank and its status as a responsible body makes it a proper authority to make important decisions requiring immediate action. The importance of the Reserve Bank is such that where the Reserve Bank makes an application for winding up under Section 37 or 38 of the Banking Regulation Act, the judicial process is excluded with respect to the momentous decision whether the winding up order should or should not be made. This decision is left to the Reserve Bank and the court merely passes an order according to the opinion of the Reserve Bank and then proceeds to wind up the banking company according to law. Banking companies fall in a special category, as they deal with the money of the depositors, who have no security except the solvency of the banking company and its sound dealings with their money. These companies carry on their activities mostly with the funds provided by the public by way of deposits and do not have substantial capital of their own. To the extent such companies develop sickness, in direct proportion the controllers of such companies usually become healthy. In a welfare State, it is the constitutional obligation of the State to protect the socially and economically weaker sections of the society against exploitation by the corporations. The same prescription may not suit in all cases of sickness. Different types of actions with different procedures may have to be taken to deal with different situations. Whether in a given situation the banking company should be acquired or should be amalgamated with another company or should be reconstructed is a matter on which some strait jacket formula cannot be prescribed. It has to be left to the decision of a reasonable body which is answerable to the Central Government. In order to perform its duties, the Reserve Bank has a large contingent of experts. If the Reserve Bank were to act mala fide, the Central Government and, in the last resort, the courts will be there to intervene. In R.K. Garg v. Union of India [1981] 4 SCC 675 ; [1982] 133 ITR 239 a Constitution Bench of the Supreme Court observed as under (page 255) :
"Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J. that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in the case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the Legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [1957] 354 US 457 where Frankfurter J. said in his inimitable style :
'In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The Legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events--self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability'."
30. Shri Pal sought support for his submission from Northern India Caterers (Private) Ltd. v. State of Punjab, AIR 1967 SC 1581 ; Deputy Commissioner and Collector v. Durganath Sarma, AIR 1968 SC 394 ; Nagpur Improvement Trust v. Vithal Rao, AIR 1973 SC 689 and B.B. Rajwanshi v. State of U. P. [1988] 2 SCC 415. However, none of these authorities deal with a situation like the one in the instant case. In those cases there was no justification for leaving the choice to be made by an executive authority. In Northern India Caterers (Private) Ltd. v. State of Punjab, AIR 1967 SC 1581, Section 5 of the Punjab Public Premises and Land (Eviction and Rent Recovery) Act, 1959, left it to the discretion of the Collector to make an order of eviction in the case of the tenants of the public premises or to take proceedings by way of a suit. It was held that Section 5 enabled the Collector to discriminate against some by exercising power under that section or take proceedings by way of a suit against others, both the remedies being simultaneously available to the Government. Section 5 did not lay down any guiding principle or policy under which the Collector had to decide in which case he should follow one or the other procedure and thus the choice was entirely left to his arbitrary will. Therefore, Section 5 was held to be violating the right of equality guaranteed by Article 14. Similar was the case in Deputy Commissioner and Collector v. Durganath Sarma, AIR 1968 SC 394. There, the State of Assam could acquire land under the Assam Act No. 6 of 1955 for the purpose of works and other measures in connection with flood control and prevention of erosion on payment of nominal compensation while an adjoining land might be taken for other public purposes under the Land Acquisition Act on payment of adequate compensation. It was held that discrimination between persons whose lands were acquired under housing schemes and those whose lands were acquired for other purposes could not be sustained under Article 14 because this classification had no reasonable relation to the object sought to be achieved, viz., acquisition of the land by the State. In either case the owner lost his land and in his place, the State became the owner. Similarly, it was held in Nagpur Improvement Trust v. Vithal Rao, AIR 1973 SC 689, that it is equally immaterial whether it is one Acquisition Act or another Acquisition Act under which the land is acquired and if the existence of the two Acts would enable the State to give one owner different treatment from another equally situated, the owner who is discriminated against can claim the protection of Article 14. In B.B. Rajwanshi v. State of U. P. [1988] 2 SCC 415, Section 6(4) of the Uttar Pradesh Industrial Disputes Act, 1947, conferred power upon the State Government to remit the award of a Labour Court or Tribunal for reconsideration of the adjudicating authority before its publication without imposing any limits on the exercise of such power. It was held that once a decision had been given by a quasi-judicial authority, it would not be safe to confer on any executive authority the power of review or of remission, in respect of its decision without imposing any limitation on the exercise of such power. Section 6(4) was held to be violative of Article 14 of the Constitution, as it conferred unguided and uncontrolled power on the State Government.
31. Here, the choice has to be left to be exercised by some authority to decide as to whether the situation called for acquisition or amalgamation or reconstruction and since the choice has been left to be decided by an expert body, the Reserve Bank of India, the discretion cannot be said to be unguided and provisions of Section 45 cannot be said to be arbitrary. We, therefore, hold that Section 45 is constitutionally valid.
Point No. 4:
32. Shri Pal, has submitted that before the Central Government passes an order of moratorium under Sub-section (2) of Section 45, it is essential that there be a proper application from the Reserve Bank, as contemplated under Sub-section (1) of that section and the Central Government considers that application properly under Sub-section (2) and, for a proper consideration, it is essential that all the documents mentioned in the application are available with the Central Government, but the purported application dated March 8, 1999, was, in reality, no application but was virtually a recommendation and there was no consideration on the part of the Central Government, since the documents mentioned in the purported application had not been sent by the Reserve Bank to the Central Government before the order of moratorium was made by the Central Government.
33. The application dated March 8, 1999, had been addressed by S.P. Talwar, Deputy Governor of the Reserve Bank of India to C.M. Vasudev, Special Secretary (Banking), Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division), New Delhi. It reads as under :
"Dear Sir Affairs of Sikkim Bank Ltd.
Please refer to paragraph 7 of our letter DBOD No. 725/16.01.105/ 98-99, dated 21st January, 1999, addressed to M. Damodaran, Joint Secretary on the above subject and the subsequent discussions I had with you in Delhi on 22nd February, 1999. S.N. Kundu, the newly appointed managing director of the Sikkim Bank Ltd. has submitted a report dated 12th February, 1999, on the present position of the bank in regard to its deposits, liquidity, advances/NPAs, recovery, etc. Briefly, the findings of the report are as under :
(a) NPAs of the bank at Rs. 57.50 crore (5-2-1999) accounted for 95.2 % of total advances at Rs. 60.43 crore. The bank does not possess any realisable security in most of these accounts. Due to weak security position, the bank's prospects for recovery of NPAs are extremely bleak.
(b) As there is shortfall in provisioning to the tune of Rs. 55 crore the bank's net worth is negative.
(c) The bank has suffered an operating loss of about Rs. 7.50 crore up to 31-12-1998.
(d) Of the total deposits of the bank at Rs. 63.72 crore as on February 5, 1999, term deposits aggregated Rs. 57.16 crore or 89.7 per cent. of the total deposits, while savings and current deposits constituted only 4.6 per cent. and 5.75 per cent. High proportion of term deposits and high cost of deposits have affected the bank's viability.
(e) The maturity profile of major term deposits indicate that deposits amounting to Rs. 1.77 crore would be maturing during March, 1999, while a further sum of Rs. 6.68 crore would be maturing during April, 1999.
(f) There is a stoppage in the inflow of fresh deposits and there are also frequent requests from big depositors for withdrawal of deposits.
(g) The bank's liquid funds stood at around Rs. 5.35 crore as on 9-2-1999, and after excluding a sum of Rs. 3 crore required for smooth maintenance of clearing operations the surplus available was about Rs. 2.35 crore.
(h) Even after liquidating the entire stock of SLR securities (Rs. 2.45 crore) it would not be possible for the bank to meet its deposit liabilities after March, 1999.
2. We have since received a fax letter dated 6th March, 1999, from S.N. Kundu, managing director, Sikkim Bank Ltd., informing about the critical financial position of the bank. He has pointed out that the liquid funds (cash and balances with current account with RBI and public sector banks) available as on 5th March, 1999, amounted to Rs. 373 lakhs as against immediate liabilities towards advance clearing and draft payable to the extent of Rs. 80 lakhs. Further, a fixed deposit of Rs. 1 crore would be maturing at Hyderabad branch on 8th March, 1999, and as such, a minimum of Rs. 3 crore is urgently required for payment to depositors and conduct of the banking operations.
3. Meanwhile, we have also received the report of the special financial audit conducted by L.B. Jha and Co., chartered accountants under Section 30(1B) of the Banking Regulation Act, 1949, with reference to the financial position of the bank as on 31st December, 1998. The report is being examined in depth. On prima facie scrutiny, the findings of the report corroborate the findings of the special scrutiny conducted at Calcutta branch of the Sikkim Bank Ltd. followed by inspection of the bank as on 31st March, 1998, by our department of banking supervision. The special report has revealed that the net worth of the bank is (--) Rs. 48.04 crore and hence the CRAR is negative as on 31st December, 1998. Further, the deposits maturity pattern revealed severe liquidity problem as the bank does not have sufficient realisable assets. The report has confirmed NPAs of the bank to the order of Rs. 57.50 crore out of the total advances outstanding at Rs. 60.51 crore as on 31st December, 1998, which constituted more than 95 per cent. of the total advances.
4. After assessment of the financial position of the bank we are of the view that the bank will not be in a position to meet the claims of depositors. We therefore recommend to the Government to put the bank under moratorium with immediate effect (from the close of business as of 8th March, 1999), for a period of three months. A copy of the draft notification for the purpose is enclosed.
5. During the period of the moratorium, we may consider the option for either winding up the bank under Section 38 of the Banking Regulation Act, 1949 or for its merger with another bank. As regards winding up proceedings, our Legal Department has opined that such application will have to be filed with the Sikkim High Court at Gangtok as the bank has been registered under the Sikkim Registration of Companies Act, 1961.
6. The Government may please issue the notification for imposing moratorium on the bank with immediate effect, i.e., from the close of business as of 8th March, 1999, in order to avoid a run on the bank."
34. Pal supported by Chatterjee has submitted on the basis of paragraph 4, reproduced above that the Reserve Bank made a recommendation to the Governor to put the bank under moratorium and that there is a difference between the expression "recommendation" and "application" and since the Reserve Bank used the expression "recommended" the purported application was a letter of recommendation rather than an application.
35. It is true that the two words "apply" and "recommend" have different connotations. The dictionary meaning of the word "apply" "is to make a formal request or petition" and that of "recommend" is to "advise or counsel." It is also true that the Reserve Bank has used the expression "recommend" in paragraph 4 of the application. However, at the same time, the Reserve Bank has used the expression "please issue the notification for imposing moratorium" in paragraph 6, which is the language of an application. In our view, the application does not cease to be an application merely because it also makes recommendation and since the Reserve Bank plays a crucial role in supervising and regulating the banking activities in the country, the use of the word "recommend" is not to be considered inappropriate. Thus, there was a proper application from the Reserve Bank under Section 45(1) which became the basis for an order issued by the Central Government under Section 45(2) of the Banking Regulation Act.
36. Pal has also submitted that in the application dated March 8, 1999, the Reserve Bank referred to the report dated February 12, 1999, submitted by S.N. Kundu and the report of the special financial audit conducted by L.B. Jha and Co., chartered accountants, under Section 30(1B) of the Banking Regulation Act with reference to the financial position of the bank as on July 31, 1998, but both these documents were not sent by the Reserve Bank to the Central Government and, as such, there was no proper material available with the Central Government to enable it to consider the application of the Reserve Bank. Pal has referred to paragraph 14 of Barium Chemicals Ltd. v. A.J. Rana [1972] 42 Comp Cas 245 ; [1972] 1 SCC 240 to seek support for his submission which reads as under (page 252 of Comp Cas) :
"The words 'considers it necessary' postulate that the authority concerned has thought over the matter deliberately and with care and it has been found necessary as a result of such thinking to pass the order. The dictionary meaning of the word 'consider' is 'to view attentively, to survey, examine, inspect (arch), to look attentively, to contemplate mentally, to think over, meditate on, give heed to, take note of, to think deliberately, be think oneself, to reflect' (vide Shorter Oxford Dictionary). According to Words and Phrases-Permanent Edition, Volume 8-A 'to consider' means to' think with care. It is also mentioned that to 'consider' is to fix the mind upon with a view to careful examination ; to ponder ; study ; meditate upon, think or reflect with care."
37. It is essential that the Central Government, before passing an order under Section 45(2), examines the matter attentively with reference to all the material documents. But what documents are material is a matter for consideration by the Central Government. As is clear from the opening paragraph of the application dated March 8, 1999, Reserve Bank's letter dated January 21, 1999, addressed to M. Damodaran, Joint Secretary, Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division), was already with the Central Government. A copy of that letter is at page 710 of the record. This is a five-page letter and forty sheets were annexed therewith. This letter shows that the Central Government was already apprised of the factual position. The application dated March 8, 1999, further says that there was discussion on the matter between S.P. Talwar, Deputy Governor and C.M. Vasudev, the Special Secretary, (Banking) on February 22, 1999. It is true that it would have been better if a copy of the report of S.N. Kundu dated February 12, 1999, and the report of the special financial audit conducted by L.B. Jha and Co. had also been sent along with the application dated March 8, 1999. Yet, the failure to do so, does not lead to an inference that in the absence of these documents it was not possible for the Central Government, in the circumstances, to apply its mind before passing an order under Section 45(2). A gist of both these documents was given in the application. Affidavit filed by respondent No. 1 says that the Central Government had before it all the relevant material for satisfying itself about the necessity of making an order of moratorium and the Central Government had given a careful consideration to the material contained in the application dated March 8, 1999, of the Reserve Bank of India and it was after application of mind to the material contained in the application dated March 8, 1999, that the Central Government passed the order under Section 45(2) of the Banking Regulation Act imposing moratorium in respect of the Sikkim Bank Limited. The affidavit further states that the issue was considered at different levels in the Ministry of Finance, at the time of taking the decision, and the allegation of non-application of mind is baseless. We may also state that during the course of arguments, the Central Government made available for our perusal, their record relating to the disposal of the application dated March 8, 1999. It is another matter that we did not consider it necessary to look into it, since Pal submitted that if the court perused the records, the same should also be shown to him implying that the court should not look into the record if it was not to be shown to him. It is the practice of this court that when the court considers it necessary or desirable to look into a public record made available for perusal of the court, the court looks into it and then asks the Government counsel to show the relevant papers therein to the other side, and, if the Government claims privilege, then to decide the question of privilege and direct the parties to act according to the decision. But, in the instant case, Pal raised the objection as soon as Bhat, appearing on behalf of respondents Nos. 1 and 2, invited us to look into the record. We were and are satisfied that the application under Section 45(1) was duly considered by the Central Government and the fact that the Central Government did not consider it necessary to get both the above referred documents before taking the final decision and relied upon the contents of the application and the other documents which were available with the Central Government and also the oral discussion with the Deputy Governor of the Reserve Bank in the context that the Central Government was dealing with an application of an expert body charged under law with the duty of supervising and regulating the banking activities in the country, does not imply that the Central Government was not in a position to consider the matter attentively or did not consider it properly.
38. Pal has submitted that the Reserve Bank granted permission to open branches at Calcutta in 1995, at New Delhi and Hyderabad in 1996 and at Mumbai in 1997, which implied that the financial condition of the Sikkim Bank Limited was sound and its condition deteriorated after three additional directors and one observer was appointed by the Reserve Bank in December, 1998, and one managing director, S.N. Kundu, was appointed in January, 1999, and the Reserve Bank should not be allowed to take advantage of its own failure to improve the bank's functioning and say that an environment calling for moratorium was existing. Voluminous documentary evidence is on the record to show that the affairs of the Sikkim Bank Limited had been grossly mismanaged and the net worth of the bank was negative. It would be sufficient if we refer to only a few of these documents in brief. One letter on record is dated September 30, 1998 (at page 177), by S. Gurumurthy, executive director of the Reserve Bank of India, whereby, the board of directors, Sikkim Bank Limited was called upon to show cause why the bank's application for grant of licence for carrying on banking business should not be rejected. The letter says that the bank's application dated June 9, 1988, for grant of licence under Section 22 of the Banking Regulation Act, 1949, had been kept pending to enable the Reserve Bank to satisfy itself about the sound functioning and good performance of the applicant-bank. Further, it stated that the matter was examined several times in the past and the last inspection was carried out with reference to the position on March 31, 1997, which revealed that the bank was not functioning on sound and strong footing and the overall working of the bank was not satisfactory. As it was not possible to issue licence to the bank, unless it showed further improvement, the bank was advised that it should bring about satisfactory improvement in its working. Reference was invited to paragraph 7 of the note enclosed to DBS letter dated January 7, 1998. Further, it was stated that special scrutiny of the advances portfolio at the Calcutta branch of the bank and also an inspection of the bank with reference to the financial position as on March 31, 1998, had revealed several irregularities such as :
"(a) purchase/discount of high value local cheques on massive scale in more than 100 accounts without maintaining proper records of such transactions ;
(b) discounting of clean bills for Rs. 4.80 crore in June/July, 1996, and for Rs. 10.50 crore in March, 1997, not arising out of genuine/bona fide trade transactions ;
(c) grant of demand loan for Rs. 10 lakhs each to 48 individuals in January/February, 1997, against security of shares without determining the market value as well as marketability of shares ;
(d) grant of cash credit limit to nine borrowers in June, 1997, for an aggregate sum of Rs. 34.40 crore and to one borrower in December, 1997, for Rs. 3.00 crore without ascertaining the requirements of the borrowers and also without determining the drawing power available to the parties and."
39. It was further stated that the findings of the special scrutiny were communicated to the bank by letter dated August 1, 1998, whereby, the Reserve Bank advised the Sikkim Bank on several matters. Further, it is stated that the bank's reply dated September 4, 1998, was unsatisfactory, as it had failed to take cognizance of serious supervisory concerns of the Reserve Bank about the manner in which the affairs of the bank were being managed. It is also stated that the inspection of the bank with reference to its position as on March 31, 1998, revealed that the net worth of the bank had become negative to the extent of Rs. 40.11 crore. The letter expressed, prima facie, the opinion of the Reserve Bank that the affairs of the bank were being conducted in a manner detrimental to the interests of its depositors and the bank did not satisfy the conditions contained in Section 22(3) of the Banking Regulation Act. An annexure was enclosed with this letter giving the details of the irregularities in the conduct of the credit portfolio at the Calcutta branch of the bank. The reply to this letter was given by the Sikkim Bank Limited on October 24, 1998, requesting the Reserve Bank to drop the show-cause notice and seeking more time to show improvement and solve the problems. The reply given by the Sikkim Bank was found to be unsatisfactory by the Reserve Bank. Thereafter, three additional directors to the board of the Sikkim Bank Limited and one observer were appointed by the Reserve Bank in December, 1998. On December 15, 1998, Khizer Ahmed, executive director of the Reserve Bank issued a show-cause notice to A.M. Mustafi, the managing director, to show cause why he should not be removed on account of his acts of mismanagement, resulting in the deterioration of the financial position of the bank in an alarming manner. Subsequently, he was removed and, in his place, Kundu was appointed as the managing director in January, 1999. The letters dated February 12, 1999, March 6, 1999 and March 8, 1999, by Kundu to the Reserve Bank, amongst other documents on record, and also the report of L.B. Jha and Co., chartered accountants, show a dismal picture of the Sikkim Bank Limited and constitute sufficient material on the basis of which an order of moratorium could be made by the Central Government. Since the Reserve Bank, an expert body charged with the duty of supervising and controlling the banking institutions in the country was of the view, on the basis of relevant material, that the order of moratorium was required to be made, the court exercising jurisdiction under Article 226 would not be justified to constitute itself into an appellate body and to substitute its decision for the decision of the expert body. We see no merit in the submission that since certain branches were permitted to be opened by the Reserve Bank, an inference should be drawn that the financial condition of the Sikkim Bank Limited was sound. We also do not see merit in the submission that additional directors and the managing director appointed by the Reserve Bank ought to have effected improvement in the functioning of the bank and since they failed to improve the financial condition of the bank, moratorium should not have been enforced. We see no reason to reject the submission of Bhat that the new managing" director and the three additional directors and also one observer were appointed by the Reserve Bank to protect the interests of the banking company and also of the depositors, apart from looking to the interest of the banking system as a whole and their imminent task was to see that the persons who were controlling the bank previously and who were responsible for the dismal state of affairs, were not allowed to work to the detriment of the depositors, etc., and to help in the framing of a draft scheme as contemplated under Section 45(4) of the Banking Regulation Act.
40. We also see no merit in the submission made on behalf of the petitioners that since the application made by the Reserve Bank under Section 45(1) on March 8, 1999, was disposed of and the order of moratorium was made by the Central Government on the date of the application itself, an inference follows that the matter could not have been properly considered by the Government. Since the matter called for urgent action, once the application had been made by the Reserve Bank, to avoid a run on the Sikkim Bank Limited and to safeguard the interests of its depositors, etc., no such inference, as suggested, follows from the fact that the application was disposed of on that very date on which the application was made.
41. We, therefore, hold that there was proper consideration on the part of the Central Government on the application made by the Reserve Bank under Section 45(1) before passing the order of moratorium under Section 45(2).
Point No. 5:
42. Pal has submitted that by the letter dated June 15, 1999, the Reserve Bank gave an opportunity of hearing on the petitioners' objections to the order of moratorium as also on the proposed scheme of amalgamation but since the order of moratorium under Section 45(2) had been passed by the Central Government, the opportunity for hearing must have been given by the Central Government, and not the Reserve Bank. We see no merit in this submissions, since the petitioners themselves had filed objections against the order of moratorium as well, as would be clear from the opening portion of paragraph 20 of their objections dated June 9, 1999 :
"We sincerely hope that our aforesaid objections to the scheme and to the declaration of moratorium will be given due consideration by the authorities concerned and it is our prayer that in the interest of the depositors, promoters and shareholders and the public at large the moratorium declared by the Central Government should be immediately lifted and revoked and the directors appointed by the Reserve Bank of India in purported exercise of powers under the Banking Regulation Act, 1949, be withdrawn . . .".
43. It was held by the Delhi High Court in Bari Doab Bank Ltd. v. Union of India [1997] 89 Comp Cas 438 that the purpose of moratorium followed by a scheme for amalgamation or reconstruction by the Reserve Bank is that proper atmosphere or situation is brought into being for a short period not exceeding six months so that a draft scheme could be brought in by the Reserve Bank, finalised after hearing objections or suggestions and laid before the Central Government for its sanction and that no prior opportunity for hearing is contemplated nor practicable before passing the order of moratorium under Section 45(2) and the principles of natural justice can be relegated to a later stage, the stage of finalisation of the scheme. The Supreme Court approved this decision of the Delhi High Court in Bari Doab Bank Ltd. v. Union of India [1997] 89 Comp Cas 462 holding that the petitioners will have post-decisional opportunity at the stage of filing objections to the draft scheme framed under Section 45(4) when forwarded by the Reserve Bank under Section 45(6) of the Act. A submission was made before the Supreme Court like the one made before us that since the order of moratorium under Section 45(2) of the Act was passed by the Central Government, the post-decisional hearing against the said order should be by the Central Government and that the consideration of the objections of the petitioners by the Reserve Bank of India would not satisfy the object of a post-decisional hearing in respect of the order of moratorium passed by the Central Government. The learned Attorney General appearing on behalf of the Central Government and the learned Solicitor General appearing on behalf of the Reserve Bank of India, submitted before the Supreme Court that the objections submitted by the petitioners against the order of moratorium as also the draft scheme framed by the Reserve Bank of India under Section 45(4), have to be considered by the Central Government under Section 45(7) of the Act in the light of the comments that are made by the Reserve Bank of India on the said objections and that the apprehension of the petitioners that the said objections will not be considered by the Central Government is unfounded. In view of the submissions made on behalf of the respondents, the Supreme Court held that no fault could be found in the matter of post-decisional hearing in respect of the order of moratorium passed under Section 45(2) of the Act. Thus, post-decisional hearing by the Reserve Bank on the order of moratorium made under Section 45(2) cannot be said to be without jurisdiction. The Reserve Bank should give an opportunity for hearing on the draft scheme as also on the order of moratorium and thereafter, the Central Government must consider the objections in the light of the comments made by the Reserve Bank both on the draft scheme as well as the order of moratorium. As such, the letter dated June 15, 1999, of the Reserve Bank of India giving an opportunity for personal hearing to the petitioners, is not invalid simply because it purported to give an opportunity of hearing on the issue of moratorium as well.
44. Pal and Chatterjee have also submitted that by the letter dated June 15, 1999, opportunity of hearing was given before Khizer Ahmed, the executive director of the Reserve Bank, who was biased against the Sikkim Bank Limited and, therefore, no purpose would have been served in demanding justice from him. In this respect, reference may be made to the letter dated June 17, 1999, sent by the petitioners to C.P. Antony, the General Manager of the Reserve Bank, which, inter alia, stated :
"The personal hearing has been fixed before Khizer Ahmed, Executive Director of the Reserve Bank of India who had previously occasion to most unsatisfactorily deal with the matter of reviewing the termination of employment in a most unceremonious manner of Sikkim Bank Ltd.'s previous managing director with an unblemished record. Ahmed has preconceived ideas about the bank and its moratorium management and is totally biased against the bank. We had been unsuccessfully making frequent representation before him for improvement of the performance of bank. In the premises, we apprehend that we would not get a real hearing and consideration of our submissions,"
45. As stated earlier, Khizer Ahmed had issued notice dated December 15, 1998, (page 191) to A.M. Mustafi, the managing director to show cause why he should not be removed from the office of the managing director of the Sikkim Bank Limited for gross mismanagement of the affairs of the bank on account of which the bank had incurred a net loss of Rs. 56.22 crore for the year ending on March 31, 1998. The letter further stated that the sudden deterioration in the financial position of the bank during 1997-98 was entirely due to the mismanagement of the credit portfolio of the bank for which he as the Chief Executive Officer of the bank and also as a member of the board/credit committee was responsible. The various acts of mismanagement were detailed in this letter and a prima facie view was expressed that the continuance of Mustafi as the managing director was detrimental to public interest and the interest of the Sikkim Bank Limited and its depositors. It is submitted on behalf of the petitioners that since Khizer Ahmed had preconceived ideas about the Sikkim Bank Limited and had unsatisfactorily dealt with the matter of reviewing the termination of the employment of Mustafi in a most unceremonious manner and he was biased against the bank and the petitioners, the opportunity of hearing was, in fact, no opportunity afforded to the petitioners. It is true that the Reserve Bank was holding an adverse view about the persons who were managing the affairs of the Sikkim Bank Limited but that was the view of the entire Reserve Bank. The view of the Reserve Bank was based not on some personal reason of Khizer Ahmed but on the basis of the various reports of inspection and audit. Since, Khizer Ahmed was one of the high officers of the Reserve Bank conversant with the affairs of the Sikkim Bank Limited in his official capacity and had expressed his opinion that continuance of Mustafi was not in the interest of the Sikkim Bank Limited, its depositors and also in public interest, it does not follow that he was biased or was not capable of taking an unbiased and reasonable view in respect of the scheme framed by the Reserve Bank under Section 45(4) of the Act as also moratorium. The matters stated in the letter of Khizer Ahmed were not the only factors relevant to be considered for the disposal of the objections preferred by the petitioners.
46. It is true that the principles of natural justice are an integral part of the guarantee of equality afforded by Article 14 of the Constitution. But, as held in D.K. Yadav v. J. M. A. Industries Ltd. [1993] 3 SCC 259, the aim of the rule of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. The cardinal point that has to be borne in mind, in every case, is whether the person concerned should have a reasonable opportunity of presenting his case and the authority should act fairly, justly, reasonably and impartially. It is not so much to act judically but to act fairly, namely, the procedure adopted must be just, fair and reasonable in the particular circumstances of the case. In the instant case, since Khizer Ahmed was conversant with the affairs of the Sikkim Bank Limited and had to comment adversely against the management of that bank, while discharging his duties, it cannot be said that he was biased, and incapable of acting fairly.
47. Further, it would appear from the writ petition itself that the petitioners were never interested in post-decisional hearing. Paragraph 121 of the writ petition states :
"In view of the fact that an order of moratorium has already been imposed in respect of Sikkim Bank Limited and a purported scheme has been framed to amalgamate Sikkim Bank Limited with Union Bank of India, no useful purpose would be served in demanding any justice from the respondents. Any further demand for justice would be an empty and idle formality."
48. It also needs be mentioned that even if Khizer Ahmed was held to be biased and incapable of acting fairly, it would make no difference for the decision of the case for the simple reason that in that case the court would have passed an appropriate order to direct hearing before another officer. Pal submitted on July 26, 1999, that since the petitioners had already been given an opportunity for post-decisional hearing which they had chosen not to avail of they would not be insisting on any further post-decisional hearing. We have already reproduced paragraph 121 of the writ petition showing that they were never interested in post-decisional hearing. Otherwise also, now there is no time left to give an opportunity for post-decisional hearing, as the order of moratorium is going to expire on September 3, 1999, and the total period of moratorium under Sub-section (2) of Section 45 cannot exceed six months from the date of the moratorium and the order of moratorium was made on March 8, 1999.
49. Accordingly, we hold that Khizer Ahmed was not biased against the petitioners and the letter dated June 15, 1999, of the Reserve Bank is not invalid.
Point No. 6:
50. Pal and Chatterjee have submitted that the order of moratorium is bad on account of mala fides on the part of the officers of the Reserve Bank of India. In this connection, they have referred to paragraphs 33 and 63 to 67 of the petition. These paragraphs read as under :
"33. In or about June, 1998, the Reserve Bank of India started its annual inspection of the books of account of Sikkim Bank Limited for the year ending March 31, 1998. The inspecting officials for some reasons best known to them started threatening that they had received instructions from their superior officers at Mumbai to prepare a report to ensure that the bank is closed down. In fact, the inspecting officials refused to cooperate with the executives of Sikkim Bank Limited and turned down the duly certified auditor's report which clearly demonstrates the fact that the bank was running at a sound footing. In fact, the auditor R.S. Ray and Associates was threatened by the officials of the inspecting team that he should change his report as per their directions to give a dismal picture of the functioning of the bank. The petitioners crave leave to refer to copies of representations made by Sikkim Bank Limited to the higher officials or Reserve Bank of India against such high-handed attitude of the inspecting officials at the time of hearing, if necessary.
63. Since the promoters/directors of Sikkim Bank Limited realised that the intention of some high officials of the Reserve Bank of India was to malign and harass the directors and executives of Sikkim Bank Limited and that the sole intention of some high officials of the Reserve Bank of India was to close down the business of Sikkim Bank Limited on one pretext or the other, several representations were made on behalf of Sikkim Bank Limited from time to time calling upon the top officials of the Reserve Bank of India to take corrective remedial measures to ensure that the business of Sikkim Bank Limited is not affected and no drastic step or decision is taken by the Reserve Bank of India to cripple the business of Sikkim Bank Limited. Copies of such representations are annexed hereto and collectively marked with the letter 'B1'.
64. The aforesaid intention of the high officials of the Reserve Bank of India would be clear from the acts and conduct of the newly appointed managing director S.N. Kundu. After S.N. Kundu was appointed, S.N. Kundu called a staff meeting where he made it clear that his sole intention was to close down the business of Sikkim Bank Limited and to have it merged with a public sector undertaking. To ensure that there is total chaos in the administration of Sikkim Bank Limited, highly placed officials at key and strategic departments of the bank were transferred with out any rhyme or reason to remote and unstrategic departments and had them replaced with junior officers with no experience. S.N. Kundu started taking decisions unilaterally without taking into confidence all the other members on the board of directors of the bank. S.N. Kundu started functioning in such a way that he made it clear that he was the sole repository of all powers and ensured that all other directors and senior officers had to act at his own whims and fancies. To ensure S.N. Kundu further ensured that all prior decisions taken by the board of directors of the bank were not implemented, S.N. Kundu took decisions unilaterally which were directly opposite to the decisions which were taken by the board of directors of Sikkim Bank Limited. Various senior officers were suspended without any reason. S.N. Kundu also ensured that steps were not taken for recovery of the dues of the bank in an effective manner. Copies of representations and documents made by Sikkim Bank Limited complaining of all such high-handed attitude of S.N. Kundu are annexed hereto and collectively marked with the letter 'C1'.
65. Your petitioners state and submit that till December 14, 1998, the date of appointment of Dr. A. Sahoo as the additional director on the board of Sikkim Bank Limited by the Reserve Bank of India, the financial condition of, Sikkim Bank Limited was sound. Its capital structure and earning prospect were adequate and it was functioning in public interest. Sikkim Bank Limited duly fulfilled all the statutory formalities and fulfilled the various ratios laid down by the Reserve Bank of India for a banking company.
66. "However, after the appointment of Dr. A. Sahoo as the additional director on or about December 14, 1998, the Reserve Bank of India ensured that all its wrongful directions given to Sikkim Bank Limited were duly published in newspapers to bring it to the notice of the public and to create a fear psychosis in the minds of the general public.
67. Various newspaper publications so published, copies whereof are annexed hereto and collectively marked with the letter 'D1' created a fear in the minds of the depositors. As a result of the newspaper publication the depositors out of fear started withdrawing their deposits. In fact, the additional directors on the board of the bank as well as the managing" director all appointed by the Reserve Bank of India encouraged the depositors to withdraw their deposits. The additional directors as well as the managing directors appointed by the Reserve Bank of India demoralised the staff. As a result of huge withdrawal by the depositors the Statutory Liquidity Ratio (SLR) of Sikkim Bank Limited as well as Cash Reserve Ratio (CRR) fell beneath the prescribed ratio laid down by the Reserve Bank of India."
51. The allegations made in these paragraphs have been controverted in the affidavit filed by respondents Nos. 2 to 6. Bhatt has submitted that the allegations about mala fides are vague and indefinite inasmuch as the names of the officers who allegedly threatened by saying that they had received instructions from their superior officers at Mumbai to prepare a report to ensure that the bank was closed down have not been given. It is true that neither the names of the inspectors who allegedly threatened nor of the officers who allegedly instructed the preparation of report against the bank have been given. The general tenor of the allegations is about the manner of functioning of the officers of the Reserve Bank or of the officers who were appointed by the Reserve Bank in connection with the affairs of the Sikkim Bank Ltd. It is evident that the acts of the officers were not to the liking of the petitioners. This court is not to inquire as to whether the acts of these officers were justified. It was for the Reserve Bank to take proper action in the matter of Sikkim Bank Limited when it came to its notice that the affairs of the bank had been mismanaged and it was essential to act in the interest of the Sikkim Bank Limited, its depositors and the banking system as a whole. The creditworthiness of a banking institution is a matter of concern not only to a few but to the whole economy and one should not be surprised, if those who have mismanaged the affairs of a bank resulting in its unsatisfactory financial condition, should make allegations against those whose duty is to act in the matter. We hold that the action taken is not bad on account of any mala fides on the part of the officers of the Reserve Bank of India.
52. Thus, the petition has no merit.
53. In the result, the petition is dismissed. However, there shall be no order as to costs.