IN THE HIGH COURT OF GUJARAT AT AHMEDABAD LETTERS PATENT APPEAL No 184 TO 215 of 2000 in SPECIAL CIVIL APPLICATION No 8558 of 1999 with LETTERS PATENT APPEAL No 253, 254, 257 & 258 of 2000 For Approval and Signature: Hon'ble MR.JUSTICE KSHITIJ R.VYAS Sd/- and Hon'ble MR.JUSTICE M.S.SHAH Sd/- ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- BANK OF BARODA Versus NADIAD MACHINERY & ELECTRICAL MERCHANT CREDIT CO.OP SOC LTD -------------------------------------------------------------- Appearance: 1. LETTERS PATENT APPEAL No. 184 of 2000 MR DARSHAN M PARIKH for Appellant No. MR DF AMIN for Respondent No. 1 MR BS PATEL for Respondent No. 1 MR MANISH R BHATT for Respondent No. 2 IN ALL OTHER LETTERS PATENT APPEALS MR DARSHAN M PARIKH for Bank of Baroda MR DV SHAH for Indian Bank MR DF AMIN, MR BP TANNA, MR BS PATEL & MR SAURIN MEHTA for Respondent-Depositors -------------------------------------------------------------- CORAM : MR.JUSTICE KSHITIJ R.VYAS and MR.JUSTICE M.S.SHAH Date of decision: 01/10/2003 CAV JUDGEMENT (Per : MR.JUSTICE M.S.SHAH) This group of Letters Patent Appeals is directed against the judgment and order dated 2.5.2000 of the learned Single Judge in Special Civil Application Nos. 3196 to 3217 of 1998 and connected petitions. The writ petitions were filed by co-operative banks/co-operative societies which are respondents herein. Some of the co-operative banks/societies have filed more than one petitions in respect of different fixed deposit receipts. Common contentions have been urged in all these appeals. Accordingly, the appeals were heard together and are being disposed of by this common judgment. Proceedings before the learned Single Judge 2.0 The facts leading to filing of the petitions are as under :- 2.1 The petitions were filed by 22 co-operative banks or co-operative credit societies for directing Bank of Baroda and Indian Bank (hereinafter referred to as "the appellants" or "the Nationalized Banks") to refund the amounts of fixed deposit receipts which the petitioners had invested with different branches of Bank of Baroda at Surat and of Indian Bank also at Surat. When the petitioners made inquiries about their annual statement of accounts, they came to know that serious mischief had taken place in as much as the amounts invested by them with the appellants had been misappropriated or substantially misappropriated by fraudulent withdrawals in the form of loans or advances against those fixed deposit receipts without any authorization of the petitioner-banks/societies. In most of the cases, the fixed deposit receipts were taken for a period of one year or 366 days. The amounts involved in case of all the petitioners ran into about Rs.30 Crores. 2.2 In response to the notice issued by the learned Single Judge, the appellant banks appeared and contested the petitions by contending that there are several disputed questions of fact. As against the contention of the petitioners that they had the original fixed deposit receipts and they had not availed of any loan/overdraft facility, the records of the appellants showed that the fixed deposit receipts were given by the petitioners to the appellants for pledging them as security for the advance obtained against the security of the said fixed deposit receipts after following due procedure. Subsequently, the fixed deposit receipts were prepaid and adjusted against the outstanding advances. It was also contended by the appellants in their counter affidavits that the petitions were filed for recovery of money and such petitions were not maintainable under Article 226 of the Constitution, that the petitioners had equally efficacious alternative remedy by way of filing civil suits, hence, the petitions deserved to be dismissed in limine. It was also pointed out that CBI inquiry was going on in respect of the subject matter of the petitions. 2.3 After considering the aforesaid preliminary objections, the learned Single Judge admitted the petitions on 16.2.2000 and made the following observations while declining to grant any interim relief:- "Rule. No interim relief at this stage. It will be open for the respondent bank to consider the matter at their highest level if it is felt that the amounts have not been paid to the petitioners and that there is fraud committed internally by the bank's employees for which the creditors should not be held responsible and to take appropriate decision for paying the amounts that may be found by it due as payable to the petitioners." 2.4 When the petitions reached final hearing, the learned counsel for Bank of Baroda stated that pursuant to the above interim order of the Court, the matter was considered by the Board of Directors and it was decided that in case any undisputed amount or credit is lying, the same may be paid to such creditor with interest of the Savings Bank Account. As far as Indian bank is concerned, its learned counsel was not in a position to point out whether any such exercise was undertaken pursuant to the aforesaid interim order. 2.5 After hearing the learned counsel for the parties in the said group of petitions, the learned Single Judge observed that, while disputed questions of fact may not be gone into by the Court in petitions under Article 226 of the Constitution, the Court was not in a position to give any definite finding as to how and in what manner the fraud, if any, had been perpetrated and how and exactly in what manner the conspiracy was carried out to its logical end and all these may be a subject matter of investigation and inquiry by the CBI and it may also be open to the concerned banks to hold proceedings against their employees, but all the same, the learned Single Judge held that the following important aspects were required to be considered :- (a) under the provisions of Sections 35A and 36B of the Banking Regulations Act, 1949, the Reserve Bank of India has been given the power to issue specific directions in the interest of banking policy in public interest to prevent the affairs of any banking Company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking Company; (b) the manner in which the large deposits to the tune of crores of rupees made by the depositors have been dealt with by the concerned branches of the appellants cannot be said to be in consonance with the banking policy and the same appears to have been conducted in a manner detrimental to the interest of the depositors and also causing prejudice to the interest of the two banking Companies themselves; (c) such scandals in a number of cases in a particular period of time with regard to particular parties have to be subjected to a thorough probe to be conducted by persons who have expertise in this regard so that the accountability and liability is fixed and if it is found that any depositor has been deprived of his money in a deceitful manner, such depositor or creditors may be remedied accordingly; (d) Investigations for fixing the criminal liability and the criminal cases may take a long time. Bona fide investors and depositors need not be made to suffer or wait till the results of such criminal cases reach the logical end especially when the depositors or co-operative societies who in turn have invested/deposited the monies belonging to a large number of persons with the expectation that their monies would be safe in such nationalized banks; (e) the interim order dated 16.2.2000 passed by the learned Single Judge in the group of petitions was not taken by the appellants in right earnest probably because of the pressure of the employees or their union; (f) entrusting the inquiry to the appellants themselves would mean that they will be prosecuting their own cause and the whole truth may not come out. IMPUGNED DIRECTIONS: 2.6 After setting out the aforesaid reasons, the learned Single Judge issued the following directions while disposing of the petitions by judgment dated 2.5.2000 :- "I. A Committee is hereby constituted as under :- (i) The Deputy Governor of the Reserve Bank of India himself or his nominee as the Chairman of the Committee. (ii) One member to be nominated by the Deputy Governor of the Reserve Bank of India who shall be the officer of the highest rank in the Reserve Bank of India but subordinate to Dy. Governor. (iii) One member from the Bank of Baroda/Indian bank to be appointed by the Board of Directors of the concerned Bank preferably a Chief General Manager or an officer not below the rank of General Manager. II. The member from Bank of Baroda would participate in the meeting of this Committee only when the cases relating to the Bank of Baroda are taken up and the member from the Indian Bank shall participate in the meeting of the Committee only when the cases relating to Indian Bank are taken up. III. The Committee may evolve and follow its own procedure and will also have the power to examine summon or examine the witnesses. IV. This Committee shall examine each and every case on its own merits with reference to the records desired to be made available and will give its findings with regard to the amount due and payable to the concerned petitioners/parties and the rate of interest. The Bank of Baroda and Indian Bank shall inform the Committee in writing about the undisputed amount with full details. This Committee shall also go into the question of the rate of interest payable in case of the undisputed amount which is directed to be paid under this order. It will be also be open for the Committee to opine as to who were the officers/employees/party responsible for this conspiracy and fraud. V. The findings as may be given by the Committee shall be binding on both the sides and shall be implemented forthwith. VI. The petitioners/parties on receipt of any amount as a result of the findings of the Committee as aforesaid, shall also give an undertaking to the concerned Bank before the amount is withdrawn, that in case as a result of CBI inquiry, it is found and held by the concerned Court after the trial that any amount had been withdrawn by any such party, as a part of the aforesaid conspiracy, etc. they will return such amount to the concerned Bank. VII. The Committee shall decide all these cases within a period of three months from the date the certified copy of this order is produced before Dy. Governor of the Reserve Bank of India. VIII. It will be open for the petitioners/parties to agitate their grievance, if any, against the orders which may be passed as a result of the findings of the Committee constituted under this Court's order as aforesaid. IX. These directions are in addition to and not in derogation of any legal remedy which any party may seek after the report of this Committee. X. For the time being, the concerned Banks, i.e. Bank of Baroda/Indian Bank shall disburse the undisputed amount, if any, with interest at the rate of Savings Bank Account to the respective petitioners/parties within 15 days from the date the copy of this order is produced before the concerned Bank. The payment shall be made through Demand Drafts in the name of the petitioners Societies/Banks/Depositors. However, if the Committee decides any rate of interest higher than the Savings Bank Account, the consequence shall follow." The learned Single Judge accordingly allowed the Special Civil Applications with the aforesaid observations and directions with no order as to costs. Interlocutory order dated 28.6.2000 in these appeals. 3 The appellants have challenged the aforesaid judgment dated 2.5.2000 by filing the present group of appeals. On 28.6.2000, this Court admitted the appeals for final hearing and after hearing the learned counsel for the parties, this Court granted interim stay only to the following extent :- (i) The operation of direction No. V (the findings as may be given by the Committee shall be binding on both the sides and shall be implemented forthwith) given by the learned Single Judge was stayed. (ii) Direction No. X given by the learned Single Judge was modified by directing that "payment or disbursement of the undisputed amount to the parties concerned would be subject to the condition that the said parties shall give valid discharge in writing to the Bank to relieve them of any future liability". This Court allowed the rest of the directions to operate subject to modification that the time limit for making the report was extended from three months to six months from the date of receipt of the Division Bench order. Supreme Court orders in Civil Appeals. 4. Bank of Baroda challenged the aforesaid interlocutory order dated 28.6.2000 before the Hon'ble Supreme Court in Civil Appeal Nos. 5890-5931 of 2000. The Hon'ble Supreme Court disposed of the appeals in terms of the following order on 16-10-2000 :- "Special leave granted. After hearing the learned counsel for the parties, we dispose of these appeals in terms of the interim order dated 21st August, 2000 passed by this Court. The operative portion of the said order is as follows :- 'Learned Solicitor General states that the bank will within one week pay the undisputed amount which is due from it to the depositors and/or deposit the same in Court. What the disputed amount is and who is entitled to receive it, may be investigated and reported by the Committee constituted by the Single Judge. The rest of the order of the High Court would stand stayed. ... ...' It is stated that some undisputed amounts have been deposited in the Court. It will be open to the claimants to file appropriate applications before the Court and withdraw the same. LPAs be heard early by the High Court if possible." COMMITTEE REPORT Constitution of Committee: 5.1 Pursuant to the aforesaid directions of the learned Single Judge as modified by this Court's interim order dated 28.6.2000, Reserve Bank of India issued the executive order dated 15.7.2000 appointing the Committee consisting of the following members :- (a) Mr JR Prabhu, - Chairman Banking Ombudsman, Mumbai (b) Mr VS Das, Regional - Member Director, RBI, Ahmedabad (c) Mr RV Iyer, - Member General Manager, Bank of Baroda or (c) Mr S Arunachalam, - Member General Manager, Indian Bank (As per the judgment of the learned Single Judge, the Committee consisted of three members - when the Committee dealt with the cases against Bank of Baroda, only the representative of Bank of Baroda was a member of the Committee alongwith the Chairman and another member appointed by Reserve Bank of India. Similarly, when the Committee dealt with the cases against Indian Bank, only the representative of Indian Bank was a member of the Committee alongwith the Chairman and another member appointed by Reserve Bank of India) 5.2 The terms of reference to the Committee were as under :- "(i) The Committee shall examine each and every case on its own merits with reference to the records and give its findings with regard to the amount due and payable to the concerned petitioners/parties and the rate of interest. It will obtain from Bank of Baroda and Indian Bank in writing full details about the undisputed amount which is directed to be paid under the Court's order. (ii) The Committee shall evolve its own procedure, examine, summon and examine the witnesses. (iii) The Committee shall opine as to who were the officers/employees/party(ies) responsible for this conspiracy and this fraud. (iv) The Committee may take the assistance of the officials of Department of Banking Supervision, Reserve Bank of India or any other officials of public sector banks for investigation purposes." Methodology followed by the Committee: 5.3 The Committee adopted the following methodology:- "(i) The Committee constituted five inspection teams for carrying out the scrutiny of the records of the petitioners and the two banks. Each team consisted of three officers - one each from the Department of Banking Supervision and the Urban Banks Department of the Ahmedabad Regional Office of Reserve Bank of India and one officer from the respective banks. While four teams scrutinized the records of the petitioners which had kept the deposits with Bank of Baroda, one of the teams scrutinized the records of the petitioners which had kept the deposits with the Indian Bank. (ii) A "Checklist" was prepared to serve as a guideline for carrying out the scrutiny by the inspection officers. (iii) Before the commencement of the scrutiny by the inspecting officers the members of the Committee briefed them as to the aspects to be looked into and the manner of carrying out the scrutiny of the records. (iv) All the petitioners as well as the two banks were asked to make their written submissions to the Committee with all the relevant documents. (v) Besides, the representatives of the petitioners were given an opportunity by the Committee to make personal submissions before the Committee and give all the facts relating to the transactions. (vi) Likewise, the representatives of the two banks were also given an opportunity by the Committee to make personal submissions before the Committee and give all the facts relating to the transactions. (vii) Besides, the branch managers/officers of the branches (where deposits were kept and advances availed of against the deposits) were asked by the Committee to make their personal submissions in relation to the deposits and advances transactions at their respective branches. (viii) The Committee also asked the "middlemen" involved in the transactions to make personal submissions before it. 5.4 The Committee submitted its report dated 20.3.2001 and the same was taken on record of these proceedings. The report makes a reference to the appellants as "the banks" and the original petitioners are referred to as "the petitioners or depositors". The report consists of the following chapters :- Chapter 1 : Introduction Chapter 2 : Developments leading to setting up of the Committee Chapter 3 : Methodology adopted by the Committee Chapter 4 : Scrutiny findings Chapter 5 : Written submissions of petitioners Chapter 6 : Oral submissions of petitioners Chapter 7 : Submissions made by Bank of Baroda Chapter 8 : Submissions made by Indian Bank Chapter 9 : Submissions of bank officers Chapter 10: Personal submissions of intermediaries Chapter 11: Action taken by Bank of Baroda Chapter 12: Action taken by Indian Bank Chapter 13: Observations and recommendations Annexure 1: Checklist provided to the scrutiny teams constituted by the Committee Annexure 2: List of office bearers and officials of petitioners and their advocates who appeared before the Committee Annexure 3: Statement showing disputed and undisputed amounts Summary & Major Recommendations: 5.5 The Committee made the following recommendations in para 7 of Chapter 13 of the report :- "(a) Repayment of deposits The contention of the petitioner depositors has been that they have not availed of advance against the security of the deposits. The discharged original deposit receipts are with the banks. As the deposit receipts were not directly handed over to the petitioner depositors against their acknowledgments when the deposits were placed with the branches it is possible that the middlemen/brokers themselves have pledged these receipts as security for the advances. The signatures discharging the deposit receipts for the purpose of availing of loans were not verified by the branch officials to ensure that the signatures were those of the authorized signatories of the petitioner depositors. The loan amounts were not credited to the accounts of the petitioner depositors. The loans were disbursed through issue of cheques/demand drafts in favour of third parties like S.P. Investment. The drawals from the accounts of third parties like S.P. Investment were invariably in cash and it has not been possible to identify the beneficiaries who have withdrawn the amounts. The contention of Bank of Baroda has been that it is possible that the funds might have gone back to the society or they might have remained with the third parties. According to the bank, the societies have tacitly agreed to the FDRs being used in such a manner and the involvement of the co-operative societies/co-operative banks in becoming a party to the fraud or the fraud having taken placed by the consent and connivance of the co-operative societies/co-operative banks has also to be taken into account. The investigations carried out by the officers deputed from the RBI and the two banks could not conclusively reveal that the funds have gone back to the co-operative societies/co-operative banks on account of the faulty procedure followed in granting the loans and the drawals were made by way of cash from the accounts. The fraud could be perpetrated on account of the bank officials not observing the necessary and usual safeguards both at the time of accepting the deposits and while granting advances thereagainst. It is possible that there was nexus between the office bearers/officials of the co-operative societies/co-operative banks and the middlemen/brokers on one hand and also nexus between the officials of the bank branches and the middlemen/brokers in perpetration of the fraud. The question that arises against this background is whether under these circumstances the banks should be called upon to refund the deposits to the co-operative societies/co-operative banks. Even assuming that some of the office bearers and officials of co-operative societies/co-operative banks were aware of the fact that advances were being availed of against their deposits, the fact remains that co-operative societies/co-operative banks are not the borrowers of the funds. Neither they have executed the loan documents nor the advances availed of appear in their books. The Indian Bank has submitted that the active role of the co-operative societies/ co-operative banks in the perpetration of the fraud cannot be denied and the bank was used as a tool for their nefarious activities and that the active role played by the societies can only be proved by extensive and cogent evidences in a regular trial. It is true that as observed by the banks all the facts could emerge only after the investigation has been completed by the CBI and on the basis of evidence produced in a court of law and cross-examination of the witnesses. Such an exercise would obviously take a long time. The role of the bank officials in perpetration of the fraud has been quite significant. It is not merely procedure lapses but grave irregularities which have necessitated major penalty proceedings against them. The banks, therefore, cannot absolve themselves of their liability. It is also observed that in the case of some of the co-operative societies/ co-operative banks as sizeable portion of their funds are blocked in deposits with the two banks they are finding it difficult to meet the claims of depositors who had placed the funds with them in deposits. Taking all the aforesaid aspects into account two members of the Committee (the Chairman, and the Regional Director, RBI, Ahmedabad office) are of the opinion that the banks should refund the disputed amounts of deposits to the petitioner depositors. The other two members of the Committee (Shri RV Iyer, Bank of Baroda and Shri S. Arunachalam, Indian Bank) are of the view that return of the deposits may amount to double payments to the petitioner depositors and that they would go by the official views of their respective banks." (emphasis supplied) [Court's Note : In effect, the Committee took the aforesaid view by majority of 2:1 that the appellant banks should refund the disputed amounts of deposits to the petitioner-depositors because as per the judgment of the learned Single Judge, the Committee consisted of only three members - the Chairman