WP(C) 5508/2005 BEFORE HON’BLE THE CHIEF JUSTICE MR. J. CHELAMESWAR HON’BLE MR. JUSTICE RANJAN GOGOI The issues arising in the writ petitions being largely similar, both the writ petitions were heard analogously and are being disposed of by this common order. 2. The petitioner in PIL 50/2006 Sri Kartik Ch. Das is a share hold er and customer of the Assam Co-operative Apex Bank Limited (hereinafter referre d to as ’the Apex Bank’). The said Bank is a co-operative society registered und er the Assam Co-operative Societies Act, 1949. The authorized capital of the Ban k is Rs. 10 crores consisting of 20 lakh numbers of shares of Rs. 50/- each. The Govt. of Assam has subscribed to 10 lakh shares out of the authorized share cap ital and the remaining 10 lakh shares are being held by different co-operative s ocieties, companies, proprietary and partnership firms as well as individual emp loyees of the Bank. According to the petitioner, most of depositors of the Bank are salaried and retired persons coming from the middle and lower class strata o f the society. According to the petitioner, as gross mismanagement and illegalit ies in the functioning of the Bank has adversely affected its interest leading t o a situation where the Bank is facing the prospect of closure, the present PIL has become necessary to seek appropriate judicial intervention in the matter. 3. In the writ petition filed, the petitioner has set out the detai ls of the claimed mis-management and illegalities that had occurred, commencing from the year 1997, adversely affecting the business interest of the Bank. The s anction of two bank guarantees of the value of Rs. 80 lakhs (approximately) in f avour of one M/s Trans Power Pvt. Ltd. on insufficient security offered by M/s S onari Tea Company and the circumstances leading to invocation of the bank guaran tee by the beneficiary thereof i.e. the ASEB; illegal/ irregular advances/ loans made available to the Sonari Tea Estate, Bokahola Tea Company Pvt. Limited, Jag duar Tea & Trading Company Pvt. Ltd., apart from several other tea estates detai ls of which are specifically available in the writ petition, have been cited by the petitioner as specific instances adversely affecting the interest of the Ban k. According to the petitioner, at the end of March, 2005, out of the total amou nt of Rs. 296.67 crores which was disbursed by the Bank as loans, Rs. 154.45 cro res was in favour of different tea companies. The petitioner has further claimed that almost 90% of the total exposure in the tea sector has become Non-Performi ng Assets (NPA) of the Bank and the said situation had developed primarily on ac count of random grant of loans and lack of proper recovery measures. 4. In the writ petition filed, the petitioner has given specific de tails of the different committees constituted from time to time to work out stra tegies and steps required to be taken for the revival of the Bank. The petitione r has averred that the core of such suggestions were to the effect that there sh ould be no further advances to defaulting tea estates; keeping the loans in the tea sector within 40% of the total loans and advances and for vigorous recovery measures. In particular, the petitioner has stressed upon the decisions taken in a review meeting dated 28.10.2005 convened by the Regional Director, Reserve Ba nk of India in which amongst others, representatives of the National Bank for Ag ricultural & Rural Development (NABARD) was present. The said decisions, accordi ng to the petitioner, were to the following effect : I. The Bank shall not extend any fresh loans to tea sector without prior pe rmission of Reserve Bank of India and NABARD. II. The Bank shall bring down its exposure to Tea Sector to the prescribed c eiling of 40% within a period of six months and the Bank may even strive to brin g exposure well below 40%. III. The Bank shall submit revised action plan to NABARD for the purpose of e xemption from the provisions of Section 11(1) of the Banking Regulation Act, 194 9. IV. The State Govt. has to release Rs. 37.24 crore representing the principa l amount of the State Govt. guaranteed loan to ATC urgently and the State Govt. to take urgent steps for repayment of the remaining Govt. guaranteed loans to Te a Sector. V. The Bank should file cases under the Bakijai Act in respect of other NPA s for quicker recovery. . According to the petitioner, the Bank had not conducted its affairs in a ccordance with the decisions arrived at in the said review meeting dated 28.10.2 005 thereby further jeopardizing its own interest. Another significant illegality that is alleged to have occurred in the affairs of the Bank is its persistent inability to comply with the provis ions of Section 11 of the Banking Regulation Act, 1949 as applicable to co-ope rative banks (hereinafter referred to as ’the Act’) which prescribe maintenance of the minimum share capital. According to the petitioner, the said default has continued persistently since 1991 with the continuous erosion of the net assets of the Bank which stood at about Rs. 88 crores as on 31.3.2005. The petitioner h as further averred that the power of exemption from the operation of Section 11 of the Act vested in the Govt. of India by the provisions of the Act has been in voked in favour of the Apex Bank only upto 31.3.2004 and for the subsequent peri ods and till date no exemption has been granted. 5. The constitution of the Managing Body of the Bank i.e. the Admin istrative Council in the extraordinary general meeting held on 29.6.2005 has als o been questioned by the petitioners in the PIL filed. According to the petition ers, in the XIIth statutory inspection report submitted by the NABARD, doubts ha ve been raised about the legality of the election of three members of the Admini strative Council, namely, Sri P.K. Roy, Sri Apurba Kr. Baruah and Sri Ripu Daman Singh. According to the petitioners, under bye-law 26(5) of the bye-laws in for ce in the Bank persons who are in default to the Bank are not eligible to seek e lection to the Administrative Council. The petitioners have averred that Sri P.K . Roy, Executive Director of one Bogidhola Tea & Trading Company Pvt. Ltd. is a guarantor for re-payment of the loan due from the said Company which is to the t une of Rs. 2.54 crores. Similarly, Sri Apurba Kr. Baruah is in default of a sum of Rs. 1.34 lakh which is due to the Bank from one Lower Daigrung Tea Estate. Th e third person i.e. Sri Ripu Daman Singh, according to the petitioners, is a mem ber of the family owning one Pabhojan Tea Estate which is in default to the Bank to the extent of Rs. 3.11 crores. It must be noticed at this stage that apart f rom Sri Apurba Kr. Baruah, who has been impleaded as respondent No.7 in the PIL, the other two persons against whom default is alleged, are not parties to the P IL. However, all the aforesaid three persons have been impleaded as respondent N os. 9, 12 and 15 in the connected writ petition i.e. WP(C) No. 5508/2005. 6. It is on the aforesaid broad facts that the petitioners have sou ght the Court’s intervention in the form of a direction to the Reserve Bank of I ndia to take over the affairs of the Bank and institute an enquiry into the cond uct of its business and, thereafter, to initiate suitable legal/ penal action ag ainst such persons/officials who may be found to be at fault. 7. The facts stated in the PIL and the reliefs sought have been con tested by each of the respondents. The Reserve Bank of India, in the affidavit f iled, challenges the locus of the petitioners to institute the PIL and questions the maintainability thereof. A reading of the affidavit filed on behalf of the Reserve Bank of India would go to show that though the Reserve Bank of India adm its its role and responsibility in the matter of supervision of the banking oper ations undertaken by a co-operative society, yet, strangely a stand has been tak en that it is the Registrar of Companies and the NABARD who would be primarily r esponsible in respect of the of conduct of the banking operations by the Apex Ba nk. 8. The Apex Bank, in the affidavit filed, has also questioned the l ocus of the petitioner and their bonafides in instituting the present PIL. Averm ents have been made to the effect that the financial condition of the Bank thoug h had deteriorated since the year 1997, of late, attempts have been made to revi ve the Bank and, in fact, for the year ending 31.3.2006 the Bank, after a lapse of several years, has earned some profits. According to the respondent Bank, act ion has been taken against Sonari Tea Estate under SARFAESI Act in respect of th e bank guarantee issued to M/s Trans Power Pvt. Ltd. In the affidavit filed, the respondent Bank has further stated that irregularities while issuing the said b ank guarantee were committed by the Managing Directors who were holding office a t the relevant points of time. All such persons are State Government officials a nd, therefore, the disciplinary power in respect of the said officials lie in th e State Government. It is the respondent Bank’s further stand that effective ste ps have been taken in the matter of recovery of the tea loans and, in fact, a su m of over Rs. 37 crores have been received from the State Government on account of loans due from the Assam Tea Corporation. The financial position of the respo ndent Bank has improved and the management of its Non Performing Assets has been made more effective, claims the respondent Bank in the affidavit filed. In the affidavit filed, the respondent Bank has further stated that the application of the Bank for exemption from the provisions of Section 11 of the Act for the peri od subsequent to 31.3.2004 is presently pending with the Government of India. In so far the allegation of defaulters being inducted in the Administrative Counci l of the Bank is concerned, the stand of the respondent Bank is to the contrary. It is specifically averred that Sri P.K. Roy, Sri Apurba Kr. Baruah and Sri Rip u Daman Singh have been elected to the Administrative Council as representatives of the co-operative societies and against the earmarked slots in the Administra tive Council for being filled up from different affiliated co-operative societie s. None of the co-operative societies which are represented by the aforesaid thr ee persons are in default to the Bank. 9. The affidavit of the Registrar of Co-operative Societies which i s available on record contains averments largely similar to those available in t he affidavit filed by the respondent Bank, save and except that according to the Registrar, dis-qualification for membership in the Administrative Council has t o be within the framework prescribed by Rules 31 and 32 of the Co-operative Soci eties Rules, 1953. None of the members of the Administrative Council including t he three persons named in the PIL, according to the Registrar, are defaulters. 10. The NABARD has also filed an affidavit in the case, details of w hich will be required to be noticed at this stage. In the said affidavit the NAB ARD has admitted that the Apex Bank has not being complying with the provisions of Section 11 (1) of the Act which fact was recorded in the report of statutory inspection conducted by the NABARD for the year ending 31.3.99. According to the NABARD, for the year ending 31.3.2005, erosion in the value of the assets of th e Apex Bank to the extent of Rs. 80.75 crores has occurred which constitute abou t 16-17 % of the total deposits. Exemption from the purview of Section 11 grante d by the Govt. of India has also expired on 31.3.2004. According to the NABARD, irregularities have been committed in the banking operations by the officers of the Bank including its Managing Directors which fact is recorded by naming the o fficer concerned in the statutory inspection report for the year ending 31.3.200 1. In the said report it has also been recorded that during the period 16.6.97 t o 1.2.2000 a number of improper decisions resulting in financial loss to the Ban k had been taken. In the affidavit filed, the NABARD has also admitted that the major part of the loans and advances of the Bank was in the tea sector and the m ajority of such loans and advances have become Non-Performing Assets. It is also admitted by the NABARD that the norms/ guidelines for grant of loans and advanc es have been violated by the Bank in respect of the tea sector. The NABARD in th e affidavit filed has also stated that with recovery of Rs. 37.24 crores from th e Govt. of Assam on account of loans made available to the Assam Tea Corporation and also on account of special recovery drives during the year 2005-06, the adv ances in the tea sector has been brought down to 36.35 % as on 27.3.2006. There are two other significant facts that must be noticed in th e affidavit filed by the NABARD. The first is that the NABARD had sought the vie ws of the Registrar of Co-operative Societies with regard to the allegations mad e in the PIL of defaulters being inducted in the Administrative Council of the B ank. According to the NABARD, it has been informed by the ROC that there are no defaulters in the said Body. This fact, however, must be read in the context of the statutory report of the NABARD for the year ending 2005 on the point at issu e i.e. of defaulters being inducted into the Administrative Council which docume nt has been annexed as Annexure-15 to the PIL. The second significant aspect tha t must be noted is the statement made in the penultimate paragraph of the affida vit filed on behalf of the NABARD to the effect that the Reserve Bank of India h as ample powers to issue directions to the Apex Bank under Section 35A of the Ac t. 11. Having noted the facts emanating from the pleadings brought on r ecord of the PIL by the different contesting parties, the Court may turn to noti ce the facts of the connected proceeding i.e. WP(C) No. 5508/2005. In the said w rit petition, election to the Administrative Council of the Bank held on 29.6.20 05, the result of which was approved by the ROC on 4.7.2005, has been put to cha llenge. The primary ground of challenge in the writ petition is that in accordan ce with the provisions of the bye-laws in force in the Bank, a schedule of elect ion was announced fixing 4 p.m. of 19.6.2005 as the last hour for filing of nomi nations. The date of withdrawal and scrutiny of the nominations was accordingly fixed. According to the petitioner in WP(C) No. 5508/2005, though under the bye- law 6(4)(a) receipt of nominations is required to be completed not less than 10 days prior to the date of holding of election, the date earlier fixed i.e. 19.6. 2005 was extended upto 4 p.m. of 27.6.2005 by an order of the Registrar of Co-op erative Societies issued on the same date i.e. 27.6.2005. According to the petit ioner, the said extension was not published and the same was kept confined to a close quarter and further that the respondent Nos. 11 and 15 to the writ petitio n who had been elected to the Administrative Council, had filed their nomination s within the extended time. In the writ petition filed, allegations have also be en levelled to the effect that the respondent Nos. 9. 12 and 15, though defaulte rs, were elected to the Administrative Council and that the nomination paper of the respondent No. 10 though defective was accepted and the said person was elec ted to the Administrative Council. The nomination paper of one Satya Nath Talukd ar, according to the petitioner, was wrongly rejected. That apart, though entry to the voting hall was restricted in time (12 noon), large number of voters were allowed to enter the voting hall after the stipulated time and the number of su ch persons exceeded the total number by which the two petitioners who had contes ted the election were defeated. According to the petitioners, the election of th e three defaulters to the Administrative Council, who in turn represented defaul ting tea estates, gives rise to serious apprehension that the banking operations , particularly, recovery of loans from the defaulting tea estates, will be serio usly jeopardized and compromised. In the writ petition filed, the petitioner has also expressed serious concerns with regard to the present state of affairs in the Bank, particularly in the matter of grant of loans to tea estates and recove ry from the defaulting units. 12. The respondent Nos. 4 and 6 in the writ petition have filed sepa rate affidavits affirming that Sri P.K. Roy, respondent No.9 and Sri Ripu Daman Singh, respondent No. 15 are defaulters, inasmuch as, the respondent No.9 stood as a guarantor for the loan due from Bogidhola Tea Company Pvt. Ltd whereas the respondent No. 15 had represented Pabhojan Tea Estate in the Assam Tea Planters’ Co-operative Society Ltd. The aforesaid respondent No. 15 had been elected to t he Administrative Council as the representative of the aforesaid co-operative so ciety. The Tea Estate in question i.e. Pabhojan Tea Estate is in default to the Bank to the extent of Rs. 3.11 crores (approximately). 13. The affidavit filed by the ROC as well as the respondent Bank in WP(C) No. 5508/2005 are more or less to a common effect. Both the aforesaid res pondents have sought to invoke the doctrine of estoppel against the petitioner s, inasmuch as, both the petitioners took part in the election held on 29.6.2005 and had approached the Court after being unsuccessful in the said election. The respondents in the affidavit filed have specifically denied that the respondent Nos. 9, 12 and 15 are defaulters, as alleged by the writ petitioners and have f urther stated that the re-scheduling of the last date of filing of nomination wa s necessary in view of the order dated 23.6.2005 passed by this Court in MC No. 1947/05 arising out of WP(C) No. 4063/05 whereby the operation of the amended by e-laws of the society was suspended. Consequently, according to the answering re spondents, it had become necessary to give an opportunity to several persons who became eligible to file their nominations in view of the aforesaid judicial ord er. 14. At the hearing of the case, additional records had been placed b efore the Court by the learned counsel for the contesting parties. Of the said r ecords, notice must be taken of a communication dated 4th June, 2007 addressed b y the Deputy General Manager, NABARD to the learned counsel representing the sai d respondent as well as the statutory report of inspection conducted by the NABA RD for the period ending 31.3.2006 as submitted under its covering letter dated 17.5.2007. 15. From the communication dated 4th June, 2007 addressed by the Dep uty General Manager, NABARD, it appears that the financial position of the Bank as on 31.3.2006 has further deteriorated and its net worth has further declined compared to the available figures for the period ending 31.3.2005. In fact, the net worth of the Bank has been progressively declining as it appears from the fi gures mentioned in the said communication dated 4th June, 2007. The said figures may be conveniently reproduced below:- Particulars Position as on 31 March 2001 Position as on 31 March 2003 Position as on 31 March 2005 Position as on 31 March 2006 & & & & &. & & & & & & &.. & & &.. Gross NPAs 72.2% 68% 71% 62.9% Net NPAs 58.6% 49.4% 49.6% 51.4% Net worth (-)2348.13 (-)4762.57 (-)8074.93 (-)11641.21 In the report of statutory inspection for the year ending 31.3.2 006 the core areas on which defaults have occurred on the part of the respondent Bank have been mentioned. The same may be conveniently be reproduced as below : - Sl. No Core Area Observation of UR for compliance 1 Non compliance with the provisions of Section 11(1) of the B.R. Act, 194 9 (AACS): With estimated erosion of Rs. 35768.97 lakh in the value of asse ts of the bank, the networth was arrived at (-) Rs.11641.21 lakh as on 31 March 2006. The bank, thus, continued not to comply with the minimum share capital req uirement as per Section 11(1) of the B.R. Act, 1949 (AACS) since 31 March 1999. The second exemption granted had already expired on 31 March 2004. The bank had not furnished application for third exemption duly approved by the GoA till the close of the present inspection (Para 11.1) 2 Non compliance with the provisions of Section 22(3)(a) & (b) of the B.R. Act, 1949 (AACS) : Realisable value of assets at Rs.45870.08 lakhs were les s than the total outside liabilities at Rs.57511.29 lakh as on 31 March 2006. Th us, the bank had not complied with the provisions of Section 22(3)(a) of the B.R . Act, 1949 (AACS). The bank had also not complied with the provisions of Sectio n 22(3)(b) of the Act, ibid, as its methods of operation could not be construed to be not detrimental to the interest of the depositors (Para 11.2 & 11.3) 3 Non compliance with the provisions of Section 18 & 24 of the B.R. Act, 1 949 (AACS) : The bank was not maintaining liquid assets register on a daily b asis as per RBI instructions vide Circular No. RPCD.RF.BC.84/A-6/87-99 dated 198 8. Also it had not correctly computed its DTL position as it had not included th e amount of gratuity payable to its staff. Therefore, it was construed that the bank had not complied with the provisions of Section 18 and 24 of the B.R. Act, 1949(AACS) (Para 11.4 & 11.5) 4 Alarming level of NPAs The gross NPA of the bank stood at Rs. 17614.85 lakh which formed 62.9% of total loans and advances as on 31 March 2006(Para 3.4 .5.19) 5. & & & & & & & & & & &.. 6. Loans and advances The loans and advances were mainly concentrated under CC to the Tea sector in respect of which several irregularities viz. poor appraisal/ post disbursement supervision, maintenance of separate yearwise/ seas onwise working capital accounts, sanctioning of fresh limits without clearance o f dues under earlier limits/ merging of them in fresh limits, time barred docume nts, non maintenance of mortgage register, non ensuring of joint custody of mort gage deeds, release of mortgage deeds without clearance of dues, inadequate liqu id securities, diversion of sale proceeds, non initiation of coercive action aga inst willful defaulters, violation of CMA guidelines, turning into NPAs of all T ea sector advances etc. were observed during the course of inspection (Para 3.4. 5.1, 3.4.5.2 & 3.4.5.6) 7 Divergence in asset classification and provisioning The bank did not ensure proper implementation of IRAC norms prescribed by RBI/ NABARD which resu lted in huge divergence in asset classification and provisioning as maybe seen f rom Appendix-III D (Para 11.12) 8. Risk Management System The bank was facing liquidity, credit, operation al, interest rate and exposure risk as on the date of present inspection (Para 5