IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN MONDAY, THE 28TH NOVEMBER 2011 / 7TH AGRAHAYANA 1933 WP(C).No. 24794 of 2010(Y) -------------------------- PETITIONER(S): --------------- 1. SUNNY PAULOSE, S/O.PAULOSE,AGED 51 YEARS VELOOKKARAYIL HOUSE, PINDIMANA, KOTHAMANGALAM. 2. K.T.VARGHESE,S/O.K.V.JOSEPH, KUNNATHU HOUSE,CHELAD PO, PINDIMANA, KOTHAMANGALAM. BY ADV. SRI.THAMPAN THOMAS RESPONDENT(S): --------------- 1. STATE OF KERALA,REPRESENTED BY THE SECRETARY TO GOVERNMENT, CO-OPERATIVE DEPARTMENT, GOVERNMENT OF KERALA,, THIRUVANANTHAPURAM-695 001. 2. THE JOINT SECRETARY TO GOVERNMENT OF KERALA CO-OPERATIVE DEPARTMENT, THIRUVANANTHAPURAM-695 001. 3. THE JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES, ERNAKULAM-682 018. 4. THE ASSISTANT REGISTRAR OF CO-OPERATIVE SOCIETIES, KOTHAMANGALAM,ERNAKULAM 5. PINDIMANA SERVICE CO.OPERATIVE BANK LTD NO.E.25,REPRESENTED BY ITS SECRETARY, PINDIMANA, KOTHAMANGALAM -686 608 . 6. ELDHO.K.THOMAS, KAVUNGHUMPILLIL HOUSE, CHELAD PO, KOTHAMANGLAM(LEADER OF CPIM AND FORMER CHAIRMAN OF THE ADMINISTRATIVE COMMITTEE_ 686 681. *7. P.I.ABRAHAM, AGED 82 YEARS, S/O. ISSAC PUTHUKKAYIL HOUSE, MALIPPARA PETITIONER.O., KOTHAMANGALAM TALUK ERNAKULAM DISTRICT. *(ADDL. 7TH RESPONDENT IS IMPLEADED AS PER ORDER DATED 10.12.2010 IN I.A. NO.16689 OF 2010) *8. ELDHOSE SCARIA, S/O. SCARIA OLICKAL HOUSE, PINDIMANA VILLAGE KOTHAMANGALAM TALUK, ERNAKULAM DISTRICT. *(ADDL. 8TH RESPONDENT IS IMPLEADED AS PER ORDER DATED 15.12.2010 IN I.A. NO.17297 OF 2010) *9. AJI K.DIVAKARAN, AGED 38 YEARS S/O. DIVAKARAN, RESIDING AT KADAYATH HOUSE PINDIMANA-686698, KOTHAMANGALAM TALUK ERNAKULAM DISTRICT. *10. S.M.ABOOBACKER, AGED 41 YEARS, S/O MUHAMMED, RESIDING AT SAIDUKUDI THRIKKARIYUR PO, PINDIMANA-686698, KOTHAMANGALAM TALUK ERNAKULAM DISTRICT. *11. SIVARAMAN KANNAN, AGED 73 YEARS, S/O. SIVARAMAN RESIDING AT PANAKKAKUDY HOUSE,PINDIMANA-686698, KOTHAMANGALAM TALUK ERNAKULAM DISTRICT. *(ADDL. RESPONDENTS 9 TO 11 ARE IMPLEADED AS PER ORDER DATED 28.11.2011 IN I.A. NO. 17669 OF 2011) BY SPECIAL GOVT. PLEADER SRI.D.SOMASUNDARAM ADV. SRI.JACOB CHACKO FOR R5 SMT.P.RAJANI FOR R5 SRI.ALEXANDER JOSEPH FOR R-6 SRI.V.G.ARUN FOR ADDL.RES. SRI.T.R.HARIKUMAR FOR ADDL.RES. SMT.SHAHNA KARTHIKEYAN FOR ADDL.R8 SRI.M.C.SEN, SENIOR ADVOCATE FOR R8 SRI.PEEYUS A.KOTTAM FOR ADDL. R9 TO R11 THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 28/11/2011 ALONG WITH WPC NOS. 31621 OF 2011 & 34275 OF 2010 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: W.P.(C) No. 24794/2010 APPENDIX PETITIONER'S EXHIBITS: EXT.P1 : COPY OF THE ORDER OF THE JOINT REGISTRAR (GENERAL) DATED 18.1.2010 EXT.P2 : COPY OF THE VALUATION CERTIFICATE DATED 27.11.2003 EXT.P3 : COPY OF THE INCOME AND EXPENDITURE STATEMENT OF 2009 EXT.P4 : COPY OF THE JUDGMENT IN W.P.(C) No. 3141 OF 2010 EXT.P5 : COPY OF THE APPEAL FILED BY THE PETITIONER BEFORE THE 1ST RESPONDENT EXT.P6 : COPY OF THE ORDER G.O(Rt) NO.203/10 DATED 22.3.2010 DISMISSING THE STAY APPLICATION EXT.P7 : COPY OF THE INTERIM ORDER IN W.P.(C) No. 13824 OF 2010 EXT.P8 : COPY OF THE ORDER NO.476/10 CO OP DATED 24.7.2010 BY THE 1ST RESPONDENT RESPONDENT'S EXHIBITS: EXT.R6(a) : COPY OF THE ENQUIRY REPORT DATED 24.8.2007 EXT.R5(a) : COPY OF THE MINUTES OF EVALUATION ON 9.8.2003 EXT.R5(b) : COPY OF THE CERTIFICATE EXT.R5(c) : COPY OF THE STATEMENT 312/10-11 DATED 2.6.2010 EXT.R5(d) : COPY OF THE LETTER 911/08-09 DATED 12.6.2008 EXT.R5(e) : COPY OF THE NOTICE 15.5.2009 EXT.R5(f) : COPY OF THE DEFECT NOTICED BY THE AUDITOR EXT.R8(a) PHOTOSTAT TRUE COPY OF INSPECTION REPORT OF THE 4TH RESPONDENT DATED 15.9.2008 EXT.R8(a) TRUE COPY OF THE REPORT DATED 15.9.2008 UNDER SECTION 68(1) OF KERALA CO-OPERATIVE SOCIETIES //TRUE COPY// P.A. TO JUDGE vps P.N.RAVINDRAN, J. --------------------------- W.P.(C) Nos. 24794, 34275 of 2010 & 31621 OF 2011 -------------------------- Dated this the 28th day of November, 2011 J U D G M E N T The petitioners in W.P.(C) No. 24794 of 2010 are members of the fifth respondent co-operative society. The first petitioner is also a member and President and the second petitioner is a member of the managing committee of the fifth respondent society. They have filed the writ petition challenging Ext.P1 order dated 18.1.2010 issued by the Joint Registrar of Co-operative Societies (General), Ernakulam surcharging them under section 68(2) of the Kerala Co-operative Societies Act, 1969 (hereinafter referred to as 'the Act' for short) and Ext.P8 order passed by the Government on 24.7.2010 upholding Ext.P1. The petitioners in W.P.(C) Nos.34275 of 2010 and 31621 of 2011 are also members of the very same society. They were formerly members of the managing committee of the said society. In the said writ petitions also the very same orders are under challenge. These writ petitions were therefore heard together and are being disposed of by this common judgment. The brief facts of the case are as follows. 2. An inspection of the books of accounts of the fifth respondent society was conducted pursuant to an order dated WPC No.24794/2010 & Conn. Cases 2 29.5.2007 issued by the Joint Registrar of Co-operative Societies (General), Ernakulam under section 66 of the Act. After inspection, the Inspector of Co-operative Societies attached to the office of the Assistant Registrar of Co-operative Societies (General), Kothamangalam submitted Ext.R6(a) report dated 24.8.2007 wherein she recommended that steps may be initiated to recover the sum of Rs.8,48,321/- being the loss caused to the society from the petitioners herein and others. Upon receipt of the said report, the Joint Registrar of Co-operative Societies (General), Ernakulam passed an order dated 13.11.2007 under section 68(1) of the Act authorising the Assistant Registrar of Co-operative Societies (General), Kothamangalam to conduct an enquiry. The Assistant Registrar of Co-operative Societies (General), Kothamangalam thereafter submitted Ext.R8(a) report dated 15.9.2008 recommending that surcharge proceedings be initiated against the petitioners and other members of the managing committee of the fifth respondent society to recover the sum of Rs.6,65,705/- being the loss caused to it. 3. The Joint Registrar of Co-operative Societies (General), Ernakulam thereafter issued notice to the petitioners and others, heard them, considered their objections and passed Ext.P1 order dated 18.1.2010 whereby he surcharged the petitioners and others WPC No.24794/2010 & Conn. Cases 3 and directed recovery of the sum of Rs.73,967.20 from each one of them for recovering the sum of Rs.6,65,705, stated to be the loss sustained by the fifth respondent society. Aggrieved thereby, the petitioners in W.P.(C) No.24794 of 2010 filed W.P.(C) No.3141 of 2010 in this Court. By Ext.P4 judgment delivered on 1.2.2010, a learned single Judge of this Court disposed of the said writ petition with a direction that in the event of the petitioners filing an appeal under section 83(1)(e) of the Act before the Government, the Government shall consider the same and pass appropriate orders thereon. Pursuant thereto, the petitioners in W.P.(C) No.24794 of 2010 filed Ext.P5 appeal before the State Government, invoking the Government's jurisdiction under section 83(1)(e) of the Act. The Government issued notice to all the persons surcharged, heard them and also the Joint Registrar of Co-operative Societies and passed Ext.P8 order dated 24.7.2010 upholding Ext.P1. Hence these writ petitions challenging Exts.P1 and P5. 4. The main contention raised by the petitioners is that the Joint Registrar of Co-operative Societies and the Government have not found in the impugned orders that any loss or damage was caused to the fifth respondent society as a result of breach of trust committed by the petitioners or their willful negligence or by their WPC No.24794/2010 & Conn. Cases 4 mismanagement or that they have misappropriated or fraudulently retained any money or property belonging to the society and therefore the order surcharging them is not sustainable. It is contended that the general body of the fifth respondent society had approved the construction of the building and therefore the steps taken to surcharge them and to realise from them the amounts spent for constructing the building cannot be sustained. As regards the surcharge proceedings initiated to recover the amount spent for computerisation and also the construction of a counter for the head office branch of the bank, it is contended no loss has been caused to the fifth respondent society and therefore an order of surcharge could not have been passed. 5. I heard Sri.Thampan Thomas and Sri.Peeyus A Kottam, learned counsel appearing for the petitioners, Sri.D.Somasundaram, learned Special Government Pleader appearing for the official respondents, Sri. Jacob Chacko learned counsel appearing for the fifth respondent society, Sri.Alexander George, learned counsel appearing for the sixth respondent in W.P.(C) No. 24794 of 2010 and Sri.M.C.Sen, learned Senior Counsel appearing for the additional eighth respondent. I have also gone through the pleadings and the materials on record. Ext.P1 order of surcharge discloses that the petitioners and others were surcharged for the purpose of realising WPC No.24794/2010 & Conn. Cases 5 from them the sum of Rs.6,65,705/- under three heads. The break up of the said amount is as follows: (i) The loss caused to the bank due to irregularities in the purchase of computer and installation of software; Rs.4,87,842/-. (ii) Unauthorised expenditure incurred for the construction of the first floor of the building at Muthamkuzhi branch; Rs.80,728/-. (iii) The expenses incurred for the construction of a counter; Rs.97,135/-. 6. The Joint Registrar of Co-operative Societies as well as the Government held in the impugned orders that though the approved estimate for construction of the first floor of the Muthamkuzhi branch building was Rs.3,92,952/-, the petitioners and other members of the managing committee expended an additional amount of Rs.80,728/- for construction of the said building but described the expenditure as incurred for various other purposes like maintenance, payment of labour charges etc., and therefore the said expenditure was unauthorisedly incurred resulting in loss to the society. As regards computerisation, it was held that though the computers were purchased and software was installed in the computers, the computers/software were purchased without proper invitation of tenders and therefore the entire amount expended in that regard is liable to be recovered from the petitioners. The same view was taken in the matter of construction of the counter in the Muthamkuzhi WPC No.24794/2010 & Conn. Cases 6 branch. 7. From a close reading of the impugned orders and also the report of enquiry under section 66 of the Act, [Ext.R6(a)] and the report submitted by the Assistant Registrar under section 68(1) [Ext.R8(a)] the following facts emerge. The Board of Directors of the fifth respondent society that met on 10.1.2003 resolved to computerise its operations. Thereupon computers were purchased in February 2003. However the quotations were approved by the Board of Directors only on 8.5.2000. The total expenditure incurred for the purchase of computers was Rs.3,07,842/-. Rs.1,80,000/- was paid to a company in three instalments, namely Rs.1,00,000/- on 18.1.2003, Rs.50,000/- on 19.5.2003 and Rs.30,000/- on 24.6.2003 for purchase of software, but it was found to be defective and there was no service support and therefore the society was constrained to buy and install another software after two years. The officer who conducted the inspection under section 66 as well as the officer who conducted the inspection under section 68(1) have in categorical terms stated that the software which was initially purchased by the managing committee of which the petitioners are members, was found to be defective, that there was no service support and the entire money spent in that regard was a waste. It is also stated in Ext.R8(a) report that though WPC No.24794/2010 & Conn. Cases 7 an agreement was entered into with M/S. Saraf Soft Solution on 17.1.2003, the said agency submitted its quotation only on 8.5.2003 and even before that date, on 18.1.2003, Rs.1,00,000/- was paid to the said agency and the day after the quotation was approved, the sum of Rs.50,000/- was paid. The officer who conducted the inspection has in Ext.R6(a) report stated that the software was found to be defective and was not functional and therefore the society was constrained to install fresh software at a later point of time. It is thus evident from the materials on record that as a result of the negligence or mismanagement of the petitioners, the society was constrained to spent the sum of Rs.1,80,000/- which did not serve any useful purpose. Such being the situation, it cannot be said that no loss was caused to the society on account of the negligence or mismanagement of the petitioners and other directors. On the terms of section 68(1) of the Act it is enough if as a result of the mismanagement of the Board of Directors or any officer of the society, loss has been caused to the society. It is not necessary where the loss is proved to have been caused on account of mismanagement to show that there was willful negligence on the part of the Director or Directors or that he or they had misappropriated any money or fraudulently retained any money or property belonging to the society. Such being the situation, WPC No.24794/2010 & Conn. Cases 8 I am of the opinion that the surcharge proceedings initiated against the petitioners and others to recover the sum of Rs.1,80,000/- paid by the society for purchase of software cannot be said to be illegal. 8. However as regards the purchase of computers of the value of Rs.3,07,842/- there is no material on record to indicate that any actual loss was caused to the fifth respondent society. The Joint Registrar of Co-operative Societies or the officer who conducted the enquiry have no case that computers were not installed in the fifth respondent society. No material has been referred to or is forthcoming to show that computers of the same configuration could have been installed at a lesser expense. In the absence of any evidence to show that any real loss was caused to the fifth respondent society, I am of the opinion that the surcharge proceedings initiated against the petitioners and others to recover the sum of Rs.3,07,842/- being the loss stated to have been caused in the purchase of computers (other than software) cannot be sustained. Exts.P1 to P8 to that extent cannot therefore be sustained and are quashed. 9. That takes me to the question whether surcharge proceedings initiated against the petitioners regarding the construction of the counter for which Rs.97,135/- was expended is in order. As in the case of purchase of computers here also there is no material to WPC No.24794/2010 & Conn. Cases 9 show that any actual loss was caused to the fifth respondent society. The fact that a counter was constructed in the Muthamkuzhi branch is not disputed. Though in Ext.P1 order of surcharge it is stated that the sum of Rs.97,135/- was spent, there is no material whatsoever available in the report of inspection held under section 66 or the enquiry held under section 68(1) of the Act to indicate that any real loss was caused to the fifth respondent society in the construction of the counter. Therefore even assuming that there was any irregularity in the entrustment of the work of construction of the counter, it cannot be said that the petitioners and other Directors are liable to be proceeded against and the amounts spent for construction of the counter recovered from them. Exts.P1 and P8 to the extent they relates to recovery of the sum of Rs.97,135/- from the petitioners and other members of the Board of Directors cannot therefore be sustained and are quashed. 10. Then the only question that remains to be considered is whether the surcharge proceedings in so far as it relates to the recovery of the sum of Rs.80,728 which was spent for construction of the first floor of the Muthamkuzhi branch is liable to be recovered from the petitioners. It is evident from the materials that though initially the estimate was Rs.3,25,000/-, it was later revised to WPC No.24794/2010 & Conn. Cases 10 Rs.3,92,952.40. However during the inspection and in the enquiry held after the inspection, it was noticed that a sum of Rs.80,728/- was additionally incurred for construction of the building but that amount was shown as expenditure incurred for effecting repairs, maintenance, labour charges etc. The finding in the impugned orders is that to make it appear that the work was completed within the limits of the approved estimate of Rs.3,92,952.40, the money which was really spent for construction of the building was shown as money spent for other purposes. In this context it is relevant to note that in Circular No.26 of 1985 dated 6.6.1985 issued by the Registrar of Co-operative Societies it is stipulated that no building shall be constructed without a plan and estimate approved by an Engineer and on completion of the construction, a final valuation certificate will have to be obtained from a qualified engineer. There is no finding either in the inspection report under section 66 or in the enquiry report under section 68(1) that the petitioners or any other member of the Board of Directors had misappropriated the sum of Rs.80,728/-. The only charge against the Board of Directors was that in addition to the approved estimate of Rs.3,92,952.40, they had spent Rs.80,728/- for the construction of the building, but described it as expenditure incurred for other purposes. In Ext.R6(a) report it is stated that the Assistant Executive WPC No.24794/2010 & Conn. Cases 11 Engineer of the Public Works Department has valued the building at Rs.4,20,000/-. The said statement is supported by Ext.P2 completion certificate dated 27.11.2003 produced in W.P.(C) No. 24794 of 2010. However that by itself does not in my opinion lead to the conclusion that the petitioners have misappropriated or fraudulently retained any money belonging to the fifth respondent society. In such circumstances, I am of the considered opinion that the surcharge proceedings in so far as it relates to the sum of Rs.80,728/- cannot also be sustained. Exts.P1 and P8 to that extent are accordingly quashed. I accordingly allow the writ petitions and quash Exts.P1 and P8 except in relation to the surcharge proceedings initiated to recover the sum of Rs.1,80,000/- incurred for installation of software. The petitioners and other members of the Board of Directors shall pay the said amount together with interest at the rate stipulated in Ext.P1 in equal shares, failing which it will be open to the respondents to recover it from them in accordance with law. The parties shall bear their respective costs. P.N.RAVINDRAN, (JUDGE) vps WPC No.24794/2010 & Conn. Cases 12