IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) THURSDAY, THE FIFTH DAY OF MAY TWO THOUSAND AND FIVE PRESENT THE HON'BLE MR JUSTICE C.Y.SOMAYAJULU WRIT PETITION Nos.23156 & 24346 of 2004 and 2501 of 2005 And W.P.M.P.No.2333 of 2005 in W.P.No.23156 of 2004 WRIT PETITION NO : 23156 of 2004 Between: Pattem Suryaprakash Rao, Late P. Venkateswar Rao, R/o. 3-1-37, Swamy Vivekananda Street, Secunderabad. ..... PETITIONER AND 1. Reserve Bank of India, Central Office, Urban Banks Department, 1st Floor, Garment House, Worli, Mumbai-400 018. 2. Commissioner for Cooperation and Registrar of Coop., Society, Gruhakalpa, Exhibition Grounds Road, Hyd. 3. The Prudential Cooperative Bank Limited, R.P. Road, Secunderabad, rep. by its Liquidator. 4. V. Amarender Rao, Liquidator, The Prudential Co-Operative Urban Bank Ltd., Alexander Road, Sairam Towers, 1st Floor, Secunderabad. .....RESPONDENTS Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the Affidavit filed herein the High Court will be pleased to issue a Writ of Mandamus or any other appropriate Writ Order or Orders, Direction or Directions, declaring the action of the 1st respondent in cancelling the licence of the 3rd respondent Bank vide proceedings dt.6.12.2004 as illegal, arbitrary and unsustainable and also to set aside the consequential proceedings of the 2nd respondent in appointing the 4th respondent as liquidator and pass such other order or orders as this Hon'ble Court may deem fit and proper in the circumstances of the case. Counsel for the Petitioner: MR.V.SRINIVAS Counsel for the Respondent No.1: Mr. M.P.UGLE Counsel for the Respondent No.2: GP FOR COOPERATION Counsel for the Respondent Nos.3&4: S.Ashok Anand Kumar WRIT PETITION NO : 24346 of 2004: Between: Depositors Association of Prudential Co-operative Bank, Twin Cities), rep. by its President, K.Srinivasulu, C/o. 4-1-216/13/304, Sneha residency, Karthikeya Nagar, Nacharam, Hyderabad. ..... PETITIONER AND 1. Reserve Bank of India, Central Office, Urban Banks Department, 1st Floor, Garment House, Worli, Mumbai. 2. Registrar of Co-Operative Societies, Govt. of A.P., Hyderabad. 3. V. Amarender Rao, Liquadator, The Prudential Co-Operative Urban Bank Ltd., Alexander Road, Sai Ram Towers, Secunderabad. 4. Prudential Co-Operative Urban Bank Ltd., rep. by its Managing Director, Alexander Road, Behind Hari Hara Kala Bhavan, Secunderabad-03. 5. Government of A.P., rep. by its Prl. Secretary, Co-op And Agriculture, Secretariat, Hyderabad. .....RESPONDENTS Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the Affidavit filed herein the High Court will be pleased to issue an appropriate writ, order or direction, especially one in the nature of Writ of Mandamus declaring the action of the 1st respondent in issuing the impugned order in its proceedings NO.UBD.WBS.BSD. IV/LC/71/12/03.0775/2004-05, dt.3.12.2004 as illegal, arbitrary, mala fide, intentional, contrary to object of the Act and not in the best interests of the Depositors and Public and consequently set-aside the same as illegal and unsustainable and pass any such other or orders as may deem fit and proper in the circumstances of the case. Counsel for the Petitioner: MR.K.V.BHANU PRASAD Counsel for the Respondent No.1: Mr. K.Srinivasa Murthy Counsel for the Respondent Nos.3&4: Mr. Ashok Anand Kumar Counsel for the Respondent Nos.2&5: MR.G.P. for Co-operation WRIT PETITION NO : 2501 of 2005: Between: Depositors Association of Prudential Co-operative Bank, (Twin CIties), Rep. by its President K.Srinivasulu, C/o. 4-1-216/13/304, Sneha Residency, Karthikeya Nagar, Nacharam, Hyderabad. ..... PETITIONER AND 1. Government of Andhra Pradesh, Rep. by its Prl. Secretary, Co-operation and Agriculture, Secretariat, Hyderabad. 2. Registrar of Co-operative Societies, Government of Andhra Pradesh, Hyderabad. 3. Prudential Co-operative Urban Bank Limited, Rep. by its Managing Director, Alexander Road, Behind Hari Hara Kala Bhavan, Secunderabad-03. 4. V. Amarender, Liquidator, Prudential Co-operative Urban Bank Limited, Alexdander Road, Sai Ram Towers, Secunderabad. .....RESPONDENTS Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the Affidavit filed herein the High Court will be pleased to issue an appropriate writ, order or direction, especially one in the nature of Writ of Mandamus declaring the action of the 2nd Respondent in issuing impugned order at the instance of 1st Respondent Proc.No. 55765/1999 U.B.V., dt.24-1-2005 as illegal, intentional, mala fide, arbitrary, without any authority and contrary to the interim direction and consequently set aside the same as illegal and pass any such other order or orders as may deem fit and proper in the circumstances of the case in the interest of justice. Counsel for the Petitioner: MR.K.V.BHANU PRASAD Counsel for the Respondent Nos.1&2: GP FOR COOPERATION Counsel for the Respondent Nos.3&4: S.Ashok Anand Kumar W.P.M.P NO : 2333 of 2005 IN W.P.NO: 23156 of 2004 Between: Pattem Suryaprakash Rao, S/O Late P. Venkateswar Rao, R/o. 3-1-37, Swamy Vivekananda Street, Secunderabad. ..... PETITIONER (Petitioner inW.P.NO : 23156 of2004 on the file of High Court) AND 1. Reserve Bank of India, Central Office, Urban Banks Department, 1st Floor, Garment House, Worli, Mumbai-400 018. 2. Commissioner for Cooperation and Registrar of Coop., Society, Gruhakalpa, Exhibition Grounds Road, Hyderabad. 3. The Prudential Cooperative Bank Limited, R.P. Road, Secunderabad, rep. by its Liquidator. 4. V. Amarender Rao, Liquidator, The Prudential Co-Operative Urban Bank Ltd., Alexander Road, Sairam Towers, 1st Floor, Secunderabad. .....RESPONDENTS (Respondents in -do-) Petition under Section 151 of CPC praying the High Court to suspend the Rc no 55765/1999 U.B.V dt 24-1-2005 issued by the 2nd respondent herein pending W.P.NO.23156 of2004 on the file of the High Court. Counsel for the Petitioner:MR.V.SRINIVAS Counsel for the Respondent No.1: Mr.M.P.UGLE Counsel for the Respondent No.2:GP FOR COOPERATION The Court made the following: THE HON’BLE SRI JUSTICE C.Y.SOMAYAJULU WRIT PETITION Nos.23156 & 24346 of 2004 and 2501 of 2005 And W.P.M.P.No.2333 of 2005 in W.P.No.23156 of 2004 COMMON ORDER: Since these petitions are interconnected, they are being disposed of by a common order. 2. W.P.Nos.23156 and 24346 of 2004 are filed questioning the order of the Reserve Bank of India (RBI) dated 06-12-2004 cancelling the banking licence issued to the Prudential Co-operative Bank Limited (the Bank) a Co-operative Society registered under the provisions of the A.P.Mutually Aided Co-operative Societies Act, 1995 (1995 Act), and ordering it to stop conducting banking business, including acceptance of and repayment of deposits forthwith, and the consequential order dated 07-12-2004 passed by the Registrar of Cooperative Societies and Commissioner for Cooperation (hereinafter referred to as RCS) appointing a liquidator to wind up the Bank. During the pendency of the petitions, since RCS, through his proceedings in Rc.No.55765/1999 U.B.V. dated 24-01-2005 introduced One Time Settlement (OTS) scheme to the debtors of the Bank, petitioner in W.P.No.23156 of 2004 filed W.P.M.P.No.2333 of 2005 to set aside the said OTS scheme alleging that the said scheme is detrimental to the interests of the depositors of the Bank and the petitioner in W.P.No.24346 of 2004 filed W.P.No.2501 of 2005 for the same relief, questioning the said OTS scheme on the same grounds. 3. The case of the petitioners in W.P.Nos.23156 and 23436 of 2004 is that the RBI cancelling the banking licence of the Bank under Section 22 of the Banking Regulation Act, 1949 (the Act), without properly considering the reply issued by the Bank and the consequential order of the RCS appointing a liquidator to wind up the Bank are unsustainable. 4. On behalf of the RBI, its Deputy General Manager filed his counter affidavit alleging, inter alia, that the RBI issued the order cancelling the banking licence of the Bank only in the interest and welfare of the general public, after taking into consideration all the facts, and after giving all possible opportunities to the Bank to revive, and so writ petition challenging that order, that too when an effective alternative remedy of appeal to the Central Government is availed of by the Bank, is not maintainable. 5. On behalf of the Government and on his own behalf, RCS filed his counter affidavit contesting the claim of petitioners. 6. On his behalf and on behalf of the Bank, the Liquidator of the Bank appointed by the RCS, filed his counter affidavit contesting the claim of the petitioners. 7. The main contention of the learned counsel for the petitioners is that proceedings dated 06-12-2004 impugned in W.P.Nos.23156 and 24346 of 2004 issued by the RBI cancelling the licence of the Bank, in pursuance of the power vested in it by Section 22 of the Act, is not properly exercised as it failed to take into consideration the reply given by the Bank in the proper perspective and passed the order mechanically just reproducing the wording employed in the statute, and the RCS issued proceedings, appointing a liquidator and so both the proceedings are unsustainable, because, the RBI which imposed a moratorium on the Bank through its proceedings dated 21-03-2003, and prohibited the Bank from granting/renewing any Loans and Advances, making any investments, or incurring any liability including borrowal of funds and acceptance of fresh deposits, or disbursing the existing liabilities or transferring its assets in any manner, should have known that with such onerous conditions and restrictions there can be no scope for the Bank to revive. It is their contention that the RBI’s failure to take into consideration the explanation of the Bank that it has recoverable advances to a tune of Rs.557.74 Crores, and cash balance of Rs.151 Crores and that its liability to the Depositors is only Rs.413 Crores, and thereby it will have a minimum surplus of Rs.100 Crores, even if Rs.195 Crores is treated as bad debts, resulted in an erroneous decision. It is their contention that such order is passed only to help the big borrowers from the Bank who have lot of political influence both in the State level and at the Centre, to avoid repayment of huge amounts of money due from them to the Bank for as long a time as possible. It is their contention that RCS was in error in appointing a liquidator without following the procedure prescribed either in the 1995 Act, or the A.P. Cooperative Societies Act, 1964 (1964 Act). It is their contention that as the provisions of 1995 Act, only when the General Body of the Cooperative Society, takes a decision to dissolve the Society, can the RCS appoint a liquidator, and in this case since the General Body of the Bank (Society) did not decide to dissolve the Bank, RCS has no jurisdiction to appoint a liquidator straightaway merely because RBI wanted him to take steps to wind up the Bank. It is his contention that though Section 36-A of 1995 Act makes Sections 115-A and 115-B of the 1964 Act applicable to the mutually aided cooperative societies, appointment of the liquidator by the RCS to wind up the Bank is bad because procedure prescribed by Section 64 of the 1964 Act of issuing a show cause notice and affording an opportunity of being heard is not followed by the RCS. It is also their contention that since 1995 Act is a self contained code the procedure in 1995 Act ought to have been followed by the RCS before appointing a liquidator to wind up the Bank. It is their contention that Government has no power to constitute a committee of MLAs to decide the OTS scheme for a Society registered under 1995 Act and since the impugned OTS scheme is not in accordance with the guidelines issued by the RBI, as it contemplates charging of simple interest only for all kinds of debts and to all debtors though OTS would usually be made applicable only to identified borrowers who have non-performing assets, but not to all the debtors irrespective of their capacity to repay the debt, the OTS scheme introduced by the liquidator, that too without concurrence of the RBI, is unsustainable. It is their contention that the OTS scheme impugned in these petitions is introduced only to help the big borrowers, who wield considerable political influence in the government, at the cost of depositors of the Bank. 8. The contention of the learned standing counsel for the RBI is that the RBI, after the statutory inspections of the Bank, having found that the Bank is not functioning satisfactorily, initially declared it as a weak Bank, and gave an opportunity to it to revive, but when it failed to recover, it declared the Bank as a sick bank, and finally, after following the procedure prescribed and after considering the explanation of the Bank, by virtue of the powers vested in it, cancelled licence of the Bank under Section 22(4) of the Act and instructed the RCS to wind up the Bank and so in view of the law laid down by the Apex Court in JOSEPH KURUVILLA VELLUKENNEL v. RBI and PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD. v. RBI the decision of the RBI should not lightly be interfered in a judicial review, more so because remedy of appeal under Section 22 (5) of the Act is availed and the appeal against the order cancelling the banking licence is pending consideration by the Central Government. The stand of RBI with the OTS scheme is not known since it did not file a counter in W.P.M.P.No.2333 of 2005 and since it is not made a party to W.P.No.2501 of 2005. 9. The contention of the learned Government Pleader is that in view of Section 39A of 1995 Act, Sections 115A and 115B of the 1964 Act would apply to Co-operative Banks registered under 1995 Act also and since Liquidator who was appointed on the instructions of the RBI, as contemplated by Section 115B of 1964 Act, recommended for introduction of OTS scheme, appointment of the liquidator, and the decision of the RBI, to cancel the banking licence of the Bank and to wind it up and the OTS scheme introduced in the welfare of the depositors for speedy payment of the amounts due to the depositors need no interference. 10. The contention of Sri E.Manohar, learned Senior counsel for the Bank and Liquidator appointed by RCS, is, since statutory appeal under Section 22(5) of the Act, preferred by the Officer who was appointed as the person-in-charge of the Bank on 31-02-2004, is pending before the Central Government, writ petitions questioning the order of RBI are not maintainable. It is his contention that since the prayer in W.P.M.P.No.2333 of 2005 is beyond the scope of W.P.No.23156 of 2004 it is liable to be dismissed. It is his contention that since Section 39 of the 1995 Act provides for voluntary dissolution of a society registered under that Act by its members, and since Section 41 of 1995 Act deals with dissolution of a society in the circumstances stated therein, those sections have no application to a case where RBI gives a direction to wind up a co-operative bank. It is his contention that since Section 36A of 1995 Act, makes applicable Sections 115-A and 115-B of the 1964 Act to Co- operative banks and since Section 115-B(ii) of 1964 Act lays down that an order of winding up of a co-operative bank can be passed under the provisions of 1964 Act, if so required by the RBI in the circumstances referred to in Section 13D of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (1961 Act), and since Section 13D (i) & (ii) of the 1961 Act empower the RBI to direct the winding up of the affairs of a co- operative bank, if it became disentitled to carry on banking business in India by reason of Section 22 of the Act, order of the RCS appointing a Liquidator to the Bank, on the directions of the RBI, is unassailable. He placed strong reliance on RESERVE BANK OF INDIA v. JOINT REGISTRAR/DISTRICT CO-OPERATIVE OFFICER where it is held that directions issued by RBI are binding on the RCS and that he has an obligation to pass orders even without issuing a show cause notice. Relying on VIRENDRA PAL SINGH v. DISTRICT ASST. REGISTRAR and B.SURYANARAYANA v. N.1453 THE K.P. CO-OP. BANK LTD. he contended that merely because a Co-operative Society is doing banking activity, it does not cease to be a Co- operative Society, and since as per entry 32 of List II of VII Schedule of the Constitution read with Article 246 of the Constitution, Government of the State, in exercise of its executive power, is competent to give instructions to Co-operative Societies for their better functioning, constitution of a committee by the government, to frame OTS scheme, for early recovery of the amounts due to the Bank, cannot be said to be ultra vires its power. It is his contention that some of the depositors of the Bank, and the Liquidator of the Bank, appeared before the committee appointed by the Government vide vide G.O.Rt.No.1248 dated 24-11-2004, and submitted their proposals to that committee on 28.12.2004, and the committee met the borrowers on 15-12-2004 and the depositors on 16-12-2004, and Sri A.Subramanyam of the Depositors’ Association participated in the proceedings and expressed his view that OTS scheme may be given without mentioning the rate of interest and so the committee agreed with the proposals of the Bank and the Liquidator and made recommendations to the Government to accept those proposals, which were agreed to by the Government with certain modifications, and thereafter, the Liquidator submitted his proposal to the committee signifying his acceptance to the modified OTS scheme, and sent the said proposal to the RCS for his approval, and was approved by the RCS, and so the OTS scheme is neither arbitrary nor illegal. It is his contention that in any event since as per the section 43(g) of the 1995 Act Liquidator has the power to settle and compromise any claim of the Society (Bank) and since Section 43(h) of the Act empowers the liquidator to do “all things necessary for the liquidation of the Co-operative Society and distribution of its property”, Liquidator does have the power to enforce OTS scheme and contended that since the Liquidator of the Bank is functioning under the supervision of the RCS, Liquidator submitted the proposals for OTS to the RCS for his approval. Relying on G.S.INDUSTRIAL GASES (P) LTD. V. MANAGING DIRECTOR, A.P.STATE FINANCIAL CORPN. where it is held that OTS scheme framed by the A.P. State Finance Corporation for settlement of recovery of loans from defaulters is not liable to be challenged on the ground that it amounts to giving rewards to defaulters while genuine debtors who repay the loans in time have to pay more than what is sought to be recovered from the defaulters, he contended that there are no grounds to set aside the OTS scheme. 11. The points for consideration are: 1. Whether the writ petitions questioning the order of RBI cancelling the Banking Licence of the Bank, when an appeal filed under Section 22(5) of the Act is pending before the Central Government is maintainable? 2. Whether appointment of a Liquidator to the Bank by the RBI to wind up the Bank is not valid? 3. Whether the OTS scheme impugned is not valid? 12. Before taking up the points for consideration, it has to be stated that there can be no dispute for the proposition that merely because it is doing banking business, a Co-operative Society doing banking business does not cease to be a Co-operative Society as held in VIRENDRA PAL SINGH case (4 supra) and B.SURYANARAYANA case (5 supra). So, the bank would still be a Co-operative Society and would be governed by the provisions of the 1995 Act and also 1964 Act, as contemplated by Section 36- A of 1995 Act. 13. Contention about the maintainability of W.P.No.23156 of 2004 was raised on the ground that petitioner therein has no locus standi to file the petition. The fact that the petitioner in W.P.No.23156 of 2004 is a depositor and that he invested his money in the Bank is not denied or disputed. As a depositor he has a right to question the transactions and events, which eventually affect his right as a depositor of money into the Bank. So, I do not agree with the contention that petitioner in W.P.No.23156 of 2004 has no locus standi to file the writ petition questioning the order of the RBI and the RCS. POINT NO.1: 14. As rightly contended by the learned standing counsel for RBI and the learned Government Pleader and the learned senior counsel for the Bank and the Liquidator, since appeal preferred under Section 22(5) of the Act by the person-in-charge of the Bank, questioning the order of the RBI cancelling the banking licence of the Bank is pending before the Central Government, the validity of that order of the RBI cannot be gone into by this Court at this stage. If the petitioners are so advised they can get themselves impleaded as parties to the appeal before the Central Government, and depending on the result of the appeal, they can pursue the remedies open to them. Therefore, I hold that these petitions questioning the order of the RBI cancelling the Banking licence of the Bank are not maintainable at this stage, as they are premature. The point is answered accordingly. POINT NO.2: 15. For the reasons best known to them none of the respondents produced the order of the RBI directing winding up of the Bank. So, the basis on which the RBI ordered winding up of the Bank is not known. Order cancelling the Banking licence of the Bank was issued by the RBI in its proceedings UBD.WBS.BSD.IV/LC/71/ 12.03.0775/2004-05 dated 03-12-2004 and were communicated vide letter Ref.No.WBS.BSD((IV) 3792/12.03.0775/2004-05 dated 06.12.2004. In para-9 (xiii) at page 22 of the counter affidavit filed on behalf of RBI, it is stated- “As regards the averments made in para 14, it is submitted that the same are not true and hence denied. It is submitted that in terms of Section 36A of Andhra Pradesh Mutually Aided Cooperative Societies Act read with Section 115-B of the Andhra Pradesh Cooperative Societies Act, read with section 13D of Deposit Insurance and Credit Guarantee Corporation Act, the RBI, C.O., Mumbai, vide his order No.UBD.WBS.IV/RLC/73/12.03.0775/2004-05 dated December 3, 2004 had required the Registrar of Coop. Societies, A.P., Hyderabad to make an order for winding up the Prudential Coop. Bank Ltd., Secunderabad. The order dated 03.12.2004 passed under section 22(4) of Banking Regulation Act, 1949 and requisition dated 3.12.2004 are legal and justified. The Registrar is legally obliged to comply with the order of the Reserve Bank and to pass order of liquidation of the bank and to appoint liquidator.” So, it is clear that a separate order to wind up the Bank by invoking the power under Section 13D of 1961 Act was passed. But, as stated above, that order is not produced. 16. As per the paper cutting of Deccan Chronicle dated 09.03.2003, filed as a material paper along with other material papers, the Bank is the ‘oldest Cooperative Bank in the State’. No doubt, as per Section 13D(1)(b) of 1961 Act, RBI can order winding up of a co-operative bank when its banking licence is cancelled as per Section 22 of the Act. But, in my considered opinion, the RBI invoking its power under Section 13D of the 1961 Act, either simultaneous or on the same day on which it passed the order under Section 22(4) of the Act cancelling the licence would be improper, because that order is subject to an appeal under Section 22(5) of the Act. If the appeal to the Central Government were to be allowed, and if during the pendency of the appeal, the liquidator were to wind up the co-operative bank, question of restoring status-quo ante, and reconstituting the dissolved co-operative bank does not and cannot arise and thus the remedy of appeal becomes useless, and would be an exercise of futility, and would make the remedy of appeal otiose and an exercise for academic purpose. So, the RBI should wait till the appeal time is over and then only pass an order for winding up of a co-operative bank. If the RBI wishes to exercise its power to order winding up