IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH MONDAY, THE 4TH FEBRUARY 2008 / 15TH MAGHA 1929 WP(C).No. 15722 of 2007(V) ------------------------------------ PETITIONER: ------------------- ADV.G.SUBODHAN, MEMBER, BOARD OF DIRECTORS, THIRUVANANTHAPURAM DISTRICT CO-OPERATIVE BANK LTD. THIRUVANANTHAPURAM. BY ADV. SRI.GEORGE POONTHOTTAM RESPONDENTS: ---------------------- 1. STATE OF KERALA, REPRESENTED BY THE SECRETARY TO GOVERNMENT, DEPARTMENT OF CO-OPERATION, GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM. 2. THE REGISTRAR OF CO-OPERATIVE SOCIETIES, THIRUVANANTHAPURAM. ADDL. 3. THE TRIVANDRUM DISTRICT CO-OPERATIVE BANK, TRIVANDSRUM, REPRESENTED BY ITS GENERAL MANAGER. R1 & R2 BY ADVOCATE GENERAL SHRI C.P. SUDHAKARA PRASAD. ADDL.R3 BY ADV. SRI.V.G.ARUN & SRI.T.R.HARIKUMAR (ADDL.R3 IS IMPLEADED AS PER ORDER IN IA NO.7992/07 DT.19.7.2007). THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 2.11.2007, THE COURT ON 04.02.2008, DELIVERED THE FOLLOWING: W.P.(C). NO.15722/07 V APPENDIX IN W.P.(C). NO. 15722/07 V PETITIONER'S EXHIBITS: EXT.P1TRUE COPY OF THE NOTICE NO.C.B.(3) 26914/06 DATED 1.12.2006. EXT.P2TRUE COPY OF THE REPLY FILED BY THE PETITIONER DATED 11.12.2006. EXT.P3TRUE COPY OF THE JUDGMENT IN W.P.(C). NO.33301/06 DATED 20.12.06. EXT.P4TRUE COPY OF THE NOTICE NO.C.B.(3) 26914/06 DT. 18.1.2007. EXT.P5TRUE COPY OF THE REQUEST GIVEN BY THE PETITIONER DATED 27.1.2007. EXT.P6TRUE COPY OF THE ORDER NO.C.B.(3) NO.26914/06 DATED 7.2.2007. EXT.P7TRUE COPY OF THE CERTIFICATE NO.670/06-07 DATED 28.6.2006 ISSUED BY THE BALARAMAPURAM BRANCH OF THIRUVANANTHAPURAM DISTRICT CO-OPERATIVE BANK LTD. EXT.P8TRUE COPY OF THE CERTIFICAZTE DATED 27.1.2007 ISSUED BY THE BALARAMAPURAM BRANCH OF THIRUVANANTHAPURAM DISTRICT CO-OPERATIVE BANK LTD. EXT.P9TRUE COPY OF THE JUDGMENT IN W.A. NO.376/07 DATED 28.3.2007. EXT.P10 TRUE COPY OF APPEAL MEMORANDUM FILED BEFORE THE GOVERNMENT DATED 9.4.2007. EXT.P11 TRUE COPY OF THE G.O. NO.348/07/CO-OP. DATED 19.5.2007. RESPONDENTS' EXHIBITS: EXT.R3(A) TRUE COPY OF THE R2EPORT DATED 15.5.2007. EXT.R1(A) TRUE COPY OF THE CIRCULAR DATED 17.8.2002. EXT.R1(B) TRUE COPY OF THE CIRCULAR DATED 30.12.2002. EXT.R1(C) TRUE COPY OF THE PROMISSORY NOTE DATED 1.1.2007. EXT.R1(D) TRUE COPY OF THE RESOLUTION DATED 14.12.2006. EXT.R1(E) TRUE COPY OF THE PROMISSORY NOTE DATED 1.1.2007. EXT.R1(F) TRUE COPY OF THE RESOLUTION OF THE DIST. CO-OP. BANK DATED 08.12.2006. EXT.R1(G) ZTRUE COPY OF THE RESOLUTION NO.35 DATED 1.2.2007. W.P.(C). NO.15722/07 V EXT.R1(H) TRUE COPY OF THE FACTUAL REPORT SUBMITTED BY THE 2ND RESPONDENT. EXT.R1(I) TRUE COPY OF THE REPORT DATED 15.5.07. //TRUE COPY// PS TO JUDGE K. M. JOSEPH, J. -------------------------------------- W.P.C. NO. 15722 OF 2007 V -------------------------------------- Dated this the 4th February, 2008. JUDGMENT Petitioner challenges Exts. P6 and P11 and seeks a declaration that the proceedings are in abuse of the statutory power, denying basic rights under law. He seeks a further declaration that NABARD and RBI Norms cannot amend or alter the meaning of the word "default" under the KCS Rules. He also seeks a declaration that the first respondent went wrong in collecting materials referred to as items 4 and 5 in Ext.P11 and the order is vitiated. 2. Case of the petitioner, in brief, is as follows: Petitioner is a member of the Managing Committee of Olikkode Handloom Weavers Co-operative Society (hereinafter referred to as "the Society"). Petitioner represents the said primary society in the Thiruvananthapuram District Co- operative Bank (hereinafter referred to as "the bank"). Under WPC NO.15722/07 V 2 the said delegation, he was elected to the Board of Directors of the District Co-operative Bank and thereafter as President of the Co-operative Bank. Election of the petitioner as President has been set aside by the Arbitration Court against which an Appeal is pending. It is his case that efforts were afoot to unseat him on one ground or other after the election as President. Reference is made to certain particulars in this regard. Second respondent obtained a Report from the Joint Registrar, Thiruvananthapuram. An inspection was conducted and Report obtained. Based on the reports, Ext.P1 notice was issued to the petitioner alleging that the society from where the petitioner represents the Bank, is in default to the Bank and the petitioner stands disqualified in terms of Rule 46(e) of the KCS Rules read with Clause 27(b) of the Byelaws of the Bank. Petitioner filed Ext.P2 reply. He also made a specific request for furnishing copy of the NABARD and RBI Norms and the ever greening which is mentioned in Ext.P1. Request was also made for furnishing copy of the Reports referred to in Ext.P1. Petitioner WPC NO.15722/07 V 3 filed a Writ Petition which came to be disposed of by Ext.P3 Judgment directing the second respondent to hear the society before taking any decision. Petitioner was served with Ext.P4 notice dated 18.1.2007. It is his case that he was not furnished with the copies of the Reports specifically requested by him for submitting an effective reply and a hearing provided pursuant to Ext.P4 was only an empty formality. He sent Ext.P5. However, Ext.P6 order was passed, finding that the petitioner is disqualified under Rule 46(e) of the KCS Rules. Ext.P7 purports to be a Certificate issued by the Branch Manager on 28.6.2006. Ext.P8 is another Certificate issued by the Branch Manager. It is stated that none of these aspects were considered by the second respondent in passing Ext.P6. Ext.P9 is the Judgment of this Court by which the petitioner was relegated to file Appeal. Ext.P10 is the Appeal and Ext.P11 is the order passed in Ext.P10 Appeal, confirming Ext.P6. Petitioner challenges Exts.P6 and P11. 3. The case set up by the first respondent in the Counter WPC NO.15722/07 V 4 Affidavit is essentially as follows: (1) Own Fund Account No.HL 07.7 (Cash Credit): It is stated that credit limit is Rs.22,85,000/=. The due date was 31.3.2006. The cash credit was renewed vide Executive Committee resolution dated 12.9.2005 upto 31.3.2007. It is stated that though there is resolution for renewal prior to the due date, the operational status of the account was "out of order" and amounts to NPA as per RBI Norms. (2) Special Package Scheme (Cash Credit): It is stated that though there was renewal prior to the due date, the operational status was "out of order" and the amount hence stands categorised as NPA. (3) Onam Cash Credit - 2005: It is stated that the cash credit was out of order from 1.1.2006 to 13.1.2006 and 1.6.2006 to 25.6.2006. There is also reference to additional cash credit account No.5/04-05. The credit limit is stated to be Rs.2 Lakhs and the due date was 25.2.2005 which was renewed on 26.6.2006. By resolution WPC NO.15722/07 V 5 dated 1.2.2007, the limit was enhanced to Rs.3 Lakhs. It is further stated that prudential norms were extended to the State Co-operative Banks and Central Co-operative Banks with effect from 1996 - 1997 by the Reserve Bank of India. Ext.R1(a) is the master circular prepared by the NABARD dated 17.8.2002. Ext.R1(b) is Circular dated 30.12.2002 by the Reserve Bank of India. It is stated that there are two types of advances - one is loan and the other is cash credit facility. The loan may be short term loans, mid term loans and long term loans. It is stated that when a loan is granted, it should be repaid in instalments as per the agreement executed between the lender and loanee. The moment an instalment is defaulted as per the agreement and it subsists more than ninety days, the entire loan becomes an NPA account. In cash Credit facility, the loanee is getting a facility to withdraw the amount as permitted in the cash credit facility and to operate the same for the period allowed. This is a revolving account, it is stated. The loanee can withdraw any amount within the permitted limit and can remit back the same to be WPC NO.15722/07 V 6 withdrawn in the future dates. As stated above, the cash credit facility would be out of order, if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. Applying the ninety days norms, the loanee has to remit the interest and/or instalments of principal within ninety days. Otherwise, the account remains out of order and would become an NPA, it is stated. Ext.R1(c) is a promissory note executed by the society in connection with the extension of the cash credit from the original due date 31.3.2006 to 31.3.2007. It is stated that the society has to remit the interest every month as per the same. Reference is made to clause (16) to contend that the society has to follow the norms and regulations with regard to the banking transactions and also those regulations which are implemented subsequently. Clause (19) is referred to, to point out that it provides that in addition to the provisions of the Act and the Rules, the other Regulations in connection with the banking transactions would also apply to the loan/or cash credit facility. On going through the prudential norms of the RBI and WPC NO.15722/07 V 7 NABARD, 90 days norms will apply and hence the society is to remit the interest portion as well as the amount withdrawn from the principal amount within 90 days. The society has not paid any amount from the cash credit account and the interest alone would come to Rs.20,87,501/=. They have requested to treat this interest amount as additional cash credit facility as a separate account and to extend the period of the above cash credit facility vide Ext.R1(d) resolution. They executed Ext.R1 (e) promissory note. The request of the society was considered by the Bank vide Ext.R1(f) decision. It is stated that the additional cash credit facility as per Account No.5/04-05 for an amount of Rs.2 Lakh was also defaulted by the society. They requested to extend the period for six months from 14.2.2007 which was allowed vide Ext.R1(g) decision dated 1.2.2007. It is stated that by the extension of the period of operation of the cash credit facility, the society can operate the Account till the extended period. This does not mean that they are exempted from paying interest/the instalment due. According to RBI WPC NO.15722/07 V 8 Norms, non-performing assets means loans which are "out of order". It is stated that the Board of Directors of the Bank of which the petitioner himself a Member is colluding with the society and renewed the defaulted norms by violating the prudential norms of the RBI. But, as per the norms, the renewal of the Account would not absolve the bank from the operation of Rule 46 as the Accounts would remain out of order if the interest and/or instalments of the principal amount remains unpaid for ninety days. It is stated that in this case the Society failed to repay the loan/cash credit amount due to the Bank as per the NABARD/RBI Norms. It is also stated that the Banking Regulation Act and the prudential norms of the RBI are applicable to the Bank. Petitioner is aware of the prudential norms and guidelines. He is none other than the Member of the Director Board of the Bank. It is stated that paragraphs 4 and 5 in Ext.P11 are factual statements submitted by the second respondent as well as the factual report with regard to overdue of the loans taken by the Society. Ext.R1(h) is produced as the WPC NO.15722/07 V 9 factual report submitted by the second respondent before the first respondent and which is referred to as item No.4. Ext. R1 (i) is produced as a Report pertaining to the overdue of Accounts held by the primary society and referred to as item No.5 in Ext.P11. It is stated that a reading of the documents would show that these are factual material to decide the issue and hence the respondents have not relied on any materials which are unaware by the petitioner. (It is also stated that in the inspection report of NABARD shows that the Bank has wrongly classified some NPA Accounts under D1/D2/D3 category. 4. I heard the learned counsel for petitioner and the learned Special Government Pleader appearing for the respondents. Counsel for petitioner would submit that Rule 46 (e) cannot be understood except with the assistance of the definition of the word "default". He, therefore, contends that the entire approach of the Registrar as also the Government is illegal, for the reason that instead of deciding the question as to whether there is disqualification under Rule 46(e) with reference WPC NO.15722/07 V 10 to the statutory context, the respondents have drawn support from materials which are irrelevant, like NPA and prudential norms in relation to NPA. Learned Government Pleader, on the other hand, would submit that the mere fact that there was renewal and time is granted would not detract from the petitioner incurring the disqualification. Petitioner ceased to be a Member by virtue of Rule 46(e). 5. Going by Ext.R1(a), an asset becomes non-performing when it ceases to generate income for the Bank. It is stated in Ext.R1(a) that from 31.3.2001, NPA shall be an advance where, inter alia, interest and or instalments of principal remain overdue for more than 180 days in respect of a term loan and the Account remains out of order for more than 180 days in respect of overdrafts/cash credit. "Out of order" status is defined as follows: "In respect of cash credit/over draft facility an account should be treated as "out of order", if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. WPC NO.15722/07 V 11 In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or Credits are not enough to cover the interest debited during the same period, these accounts should be treated as "out of order". 6. No doubt, subsequently the period of 180 days has been reduced to 90 days. Thus, if it remains out of order for 90 days, it will become NPA. But, the question is whether by reason of the fact that an asset becomes NPA, can it serve to fulfill the requirement of Rule 46(e) so as to result in a Member ceasing to be a Member of the Committee. "Default" is defined in Rule 2(d) of the Co-operative Societies Rules as follows: "2(d): "Default" means failure on the part of any person, to repay to the financing bank or to any other society a loan or any other amount due to it within the time fixed for repayment or to return to the society within the time fixed the WPC NO.15722/07 V 12 finished goods in respect of raw materials advanced or to keep any other obligation for the fulfilment of which a time limit has been specified in the bye-laws." The definition "default" as already extracted, makes it clear that "default" is contemplated only if the amount is not paid within the time stipulated. In these cases, it is to be noted that renewal is granted. Thus, while it may be true that in respect of those items, it may have become NPA, the question to be answered would be as to whether there is default within the meaning of the definition of the word "default" in the Rules in the light of the extension of time to pay the amount. I would think that the approach of both the Joint Registrar and the Government in this case has been only to enter a finding under Rule 46(e) with reference to the prudential norms under which an asset is classified as NPA. I do not think that this approach has the support of law, for, it would be quite contrary to look at it only from the point of view as to whether it has become NPA WPC NO.15722/07 V 13 without considering the question as to whether on the facts, the person is in default under Rule 2(d). 7. I also note that reference is made in Ext.P11 to an additional cash credit No.5/2004 - 2005. I note further that Ext.R1(i) which is the Report which is read as item No.5 in Ext.P11, contains reference to the additional cash credit. To that extent, there appears to be some merit, I think, in the contention of the petitioner regarding reliance placed on the Report by the Government in passing Ext.P11 order being suspect in law. This is for the reason that in Ext.P1 notice issued, reference is not seen made to the additional cash credit 2003-2004 which is referred to in Exts.R1(i) and Ext.P11. I would have directed a reconsideration, but for another feature which I detail hereinafter. 8. The question which arises, however, is with regard to the Onam Cash Credit, 2005. In Ext.P1 notice, it is specifically averred that the cash credit was sanctioned on 10.9.2005 in a sum of Rs. 1 Lakh. An amount of Rs.1 Lakh was withdrawn on WPC NO.15722/07 V 14 13.10.2005. It is further stated that it fell into arrears from 1.11.2005 till 26.6.2006. Even though the account was to be closed as per the renewal on 15.7.2006, it ws closed only on 17.7.2006. In the Reply given as Ext.P2, it is the case of the petitioner that the amount could not be deposited on 15.7.2006. 15.7.2006 was a Saturday. Even though it is stated that they were prepared to close the account on 15.7.2006, it is stated that on account of the dearth of staff and as it went beyond 12 Noon, as per the direction of the Manager, the amount came to be deposited on 17.7.2006; 16.7.2006 was a Sunday. Therefore, the answer in short was that it was only on account of the inconvenience of the District Co-operative Bank on 15.7.2006, the account could not be closed on 15.7.2006. It is also stated that there is no complaint for the Debtor and Creditor, and that there is no notice by the Bank. 9. Petitioner has taken up the contention based on the definition of the word "default". If one goes by the concept of "default" which the petitioner swears by, it is clear that even if WPC NO.15722/07 V 15 it be for reasons as contended by the petitioner, the payment was not made by the due date ie. 15.7.2006. Met with the situation, learned counsel for petitioner would contend that having regard to Rule 46(e), in view of the fact that the amount has been paid on 17.7.2006 much before Ext.P1 notice which is dated 1.12.2006, petitioner would not cease to be a Member. Rule 46(e), in so far as it is relevant, reads as follows: "46. Term of office of member of committee who is delegate of another Society .- A delegate of one society sitting on the committee of another society shall cease to be a member of such committee, - (e) If the society which sends him as delegate is in default to the society, in the committee of which he sits as a delegate: Provided that in the cases of delegates of Primary Co-operative Agricultural Development Banks in the Committee of the Kerala State Co-operative Agricultural Development Bank and of Primary Housing Societies in the Committee of the Kerala State Co-operative Housing Federation Ltd., the WPC NO.15722/07 V 16 disqualification shall apply only if the default exceeds six months. Provided further that in the case of delegates of Primary Agricultural Credit Societies in the Committee of the District Co- operative Banks, this disqualification shall apply only if the default exceeds ninety days." 10. He would point out that unless there is default at the time of notice, a person cannot be declared as defaulter in the light of the decisions in Thommen Itticheriyanthu v. State of Kerala (1978 KLT 887), Madanamohanan Kartha v. Elamkulam Service Co-op. Bank (1983 KLT 640) and Abdul Rasheed v. State of Kerala (1988 (1) KLT 190), all of which are Bench Decisions of this Court. 11. However, it is contended on behalf of the State that the said principle is not applicable. It is contended that the decisions canvassed by the petitioner laying down the principle were all rendered under Rule 44. In Rule 44 Sub-rule (3) provides that there must be an order declaring a disqualification WPC NO.15722/07 V 17 and it is only on account of the same, that the said principle is applicable. In other words, in a case governed by Rule 46(e) upon the disqualification being incurred without any order by any authority, a delegate ceases to be a Member of the Committee. 12. Rule 44(3) reads as follows: "44. Disqualification of membership of committee - (3) If any person is or becomes disqualified to be a member of the committee, the Registrar may on his own motion or on a representation made to him by any member of the society or by its Financing Bank by an order in writing declare that he shall cease to be a member of the committee of the society concerned from the date of such disqualification. Before passing an order, the Registrar shall give such person an opportunity to state his objections, if any, against the proposed action and if the person wishes to be heard, he shall be given an opportunity to be heard." WPC NO.15722/07 V 18 13. It is brought to my notice also that the matter has been referred to a Full Bench noting a conflict between the decisions in Mathew v. Deputy Registrar of Co-op. Societies (1979 KLT 818) and Madanamohanan Kartha v. Elamkulam Service Co-op. Bank (1983 KLT 640). In Thommen Itticheriyanthu v. State of Kerala (1978 KLT 887), the question fell under Rule 44(1)(c). The Court held as follows: "Action under rule 44(1)(c) would be justified only if the member concerned is in default to the society or to any other society in respect of a loan or loans taken by him or loan in which he has stood surety, for such period, as is prescribed in the byelaws or in any case for a period exceeding three months or "is a defaulter to the society or to any other society". In employing the present tense by using the word "is", the rule-making authority has clearly indicated its intention that the disqualification will be attracted only if at the time when the proceedings under the rule are initiated the person actually occupies the character of a defaulter. The mere fact that at some time in the WPC NO.15722/07 V 19 past a member might have been in default to the society or to any other society in respect of any loan etc. will not afford a valid ground for taking action under rule 44 unless it is further shown that the state of such default actually continued to exist as on the date when the proceedings under the rule are initiated." This proposition is seen upheld in Madanamohanan Kartha v. Elamkulam Service Co-op. Bank (1983 KLT 640) and in Abdul Rasheed v. State of Kerala (1988 (1) KLT 190). 14. Rule 46 does not contain a provision similar to Rule 44(3). In the case of a disqualification within the meaning of Rule 44, an order declaring that a person shall cease to be a Member of the Committee from the date of such disqualification, is a statutory mandate. I find that a learned Single Judge has in Paulose v. Joint Registrar (1993 (2) KLT 366) taken the view that in respect of a case covered by Clause (b) of Rule 44(2), no notice is required under Sub-rule (3) of WPC NO.15722/07 V 20 Rule 44. This was on the basis of the express language of Rule 44(3), requiring such notice in the context of the word "disqualify" used therein. As far as Rule 46 is concerned, there is no such requirement of a notice to declare him as having ceased to be a Member of the Committee. If that be so, learned counsel for petitioner may not be correct in drawing support from the principles laid down in the Bench decisions which I have referred to. I make it clear that I am not expressing any opinion in regard to clause (d) of Rule 46, as, in so far as therein, reference is made to disqualification in