SCA/14061/2005 1/32 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 14061 of 2005 With SPECIAL CIVIL APPLICATION No. 6958 of 2005 With SPECIAL CIVIL APPLICATION No. 6977 of 2005 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAH ============================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ============================================================== VERAVAL MERCANTILE CO OP. BANK LTD. THRO.NAGINBHAI DESAI - Petitioner(s) Versus RESERVE BANK OF INDIA & 5 - Respondent(s) ============================================================== Appearance : MR HARIN P RAVAL for Petitioner(s) : 1, MR AMAR N BHATT for Respondent(s) : 1, Mr. Kamal B. Trivedi, Additional Advocate General for Respondent(s) : 2 - 4. Mr. ND Nanavaty for NANAVATY ADVOCATES for Respondent(s) : 5 - 6. ================================================================== CORAM : HONOURABLE MR.JUSTICE M.R. SHAH Date : 29/12/2005 ORAL JUDGMENT As common question of law and facts arise in this group of petitions and they are interconnected, SCA/14061/2005 2/32 JUDGMENT the same are being disposed of by this common judgment and order. 2. A short but an interesting question of law arises in this group of petitions whether a Cooperative Bank is bound to give the benefit of One Time Settlement Scheme ('OTS Scheme') floated by the Reserve Bank of India (RBI) and/or bound by any direction issued by the Registrar, Cooperative Societies, State of Gujarat, directing the Cooperative Bank to give benefit of OTS Scheme to judgment debtor and/or to a person who has taken loan and/or financial assistance from a Cooperative Bank and there are dues of the Cooperative Bank, irrespective of the fact whether such a Cooperative Bank is in a position to recover the amount due to it from the said persons and/or out of securities or from guarantors and/or out of property of such guarantors, and/or whether it is mandatory for such Cooperative Bank to grant benefit of OTS Scheme irrespective of the fact whether such Cooperative Bank is in a position to recover the entire amount from the property of the customer/loanee who has taken a loan and/or from his guarantor. 3. So far as Special Civil Application No.14061 of 2005 is concerned, the same is filed by Veraval Mercantile Cooperative Bank Ltd (hereinafter referred to as “the Bank”) for an appropriate, writ, order or direction quashing and setting aside the order dated SCA/14061/2005 3/32 JUDGMENT 30th October 2004 passed by the Registrar, Cooperative Societies, State of Gujarat in purported exercise of powers under Clause 7 of the Revised Guidelines for OTS of Non-Performing Assets of Primary (Urban) Cooperative Banks declared by RBI and by which the Registrar, Cooperative Societies, State of Gujarat, has granted permission/directed the petitioner to extend the benefit of OTS Scheme in favour of respondents No. 5 and 6. 4. So far as Special Civil Applications No. 6958 of 2005 and 6957 of 2005 are concerned, the same are filed by the judgment-debtors, i.e., respondents No. 5 and 6 of Special Civil Application No. 14061 of 2005 for an appropriate, writ, direction or order directing the Bank to grant the benefit of OTS Scheme as per the direction/decision of the Registrar, Cooperative Societies, State of Gujarat, dated 30th October 2004 which is impugned in the Special Civil Application No. 14061 of 2005. 4.1 The respective parties are referrred as per their position as per the committee of Special Civil Application No. 14061 of 2005. It is the case on behalf of the Bank that respondent No.5 was the Chairman of the Bank for last about 25 years and respondent No.6 remained Director of the Bank from 1997 to 1998. Thereafter in 1998, the respondent No.5 ceased to be Chairman of the Bank and the respondent No.6 also ceased to be Director of the Bank. It is the case on behalf of the Bank that RBI SCA/14061/2005 4/32 JUDGMENT is an authority authorized to carry out inspection of the petitioner Bank and accordingly periodical inspections have been carried out by the Inspection Teams of the RBI and from time to time various details were called for by the RBI, Urban Banks Department, and pursuant to the scrutiny made by the Urban Banks Department of the information sent by the Bank in a statement in Proforma 1 and 2 for the quarter ended on 30th June 1996 and 30th September 1996, it was found that all types of advances (Secured & Unsecured) granted to the then Chairman, Shri Rajnikant R. Shah (respondent No.5 herein)/his relatives and connected group which amounted to Rs. 252.36 lakhs as on 30th June 1996 and 30th September 1996 respectively were in excess of the maximum permissible limit of 50 per cent of the Bank's Capital Funds and the Bank was asked to recover the excess amount under advice to the RBI vide communication dated 30th November 1996. By communication dated 17th January 1997 from the Assistant General Manager, RBI. The Bank was directed to take necessary steps so as to regularize the position immediately and not later than 31st January 1997 in the matter of maximum limits of advances to Directors and their relatives. It is the case on behalf of the Bank that the aforesaid direction was in connection with the advances to the then Chairman, respondent No.5 together with Dahyalal Shah, former Director of the Bank. It is the case on behalf of the Bank that the respondents No. 5 and 6 taking advantage and benefit of their position as Chairman SCA/14061/2005 5/32 JUDGMENT and Director, not only exceeded the limits prescribed for maximum borrowings, but they have committed willful defaults in repayment of the principal and interest and according to the Bank their actions would amount to malfeasance inasmuch as more particularly in the case of respondent No.5 (the then Chairman) necessary documents, property papers, details thereof were not even filled-up at the time when these loans were applied for and sanctioned. Even thereafter also by letter dated 22nd October 1997 the Manager of the Bank was again intimated that the respondents No. 5 and 6 and 2 other Directors, namely Dahyalal Shah and A.R. Hemani had exceeded their limits sanctioned to them. It is the case on behalf of the Bank that thereafter there was inspection by the team of the Reserve Bank of India and the said inspection revealed that the Bank had sanctioned loans against security of plant and machinery in Real Estate in which the respondents No. 5 and 6 were interested and there were four such accounts where limits sanctioned were Rs. 15 lakhs, 20 lakhs, 15 lakhs and Rs. 40 lakhs respectively for total amount of Rs. 90 lakhs which was outstanding as on 31.12.1997 to the tune of Rs. 34.60 lakhs, 45.94 lakhs, 34.59 lakhs and Rs. 62.32 lakhs totalling to Rs. 177.45 lakhs. According to the Bank even with regard to other accounts, following discrepancies were observed by the Inspecting Team of the RBI; SCA/14061/2005 6/32 JUDGMENT “a. Proper scrutiny was not made before the sanctioning limits. Financial statements, income-tax returns and other related papers were not obtained with the application. b. It was noticed during the course of inspection that the complete plant was shut down and machineries hypothecated to the bank, were found missing. The land mortgaged to the bank was divided into various plots and the Board Manoram Township was displayed on the site, office building and residential quarter. c. Further, these accounts did not show any turnover as well as business transactions. Consequently, these accounts were overdue. End use of the advances granted, thus, was not verified by the bank, and it was clear that the funds were not utilized for the purpose for which facilities it was granted. d. To regularize these overdue position of the above accounts, bank had renewed the limits from time to time. e. Though repayment schedule was prepared in each of the accounts, bank had not ensured the prompt recovery of installments. f. General Manager's specific recommendations on the loan application were not obtained.” Even the Inspecting Team had also found so many serious irregularities with regard to other accounts also and as per the report the outstanding balance in all the accounts was Rs. 300.79 lakhs as on 31st December 1997. It is also the case of the petitioner SCA/14061/2005 7/32 JUDGMENT Bank that even in the year 1997 the District Registrar, Cooperative Societies issued a communication dated 28.2.1997 to the Bank calling upon the Bank to take action against those directors including respondents No. 5 and 6, the then Chairman and the Director on the ground that in view of the provisions of Section 32 of the Gujarat Cooperative Societies Rules, 1965, read with bye-laws they being in default and unauthorized arrears, they were not entitled to continue as Directors and the Bank was asked to call a meeting within 7 days and take steps to remove the said Directors including the former Chairman and former Director, i.e., respondents No. 5 and 6 herein from the Managing Committee. It is the case of the Bank that inspite of the aforesaid the respondents No. 5 and 6 continued to be Chairman and Director of the Bank and on account of such action the Bank had to face sudden rush for about 3 days of depositors seeking withdrawal of their monies which was on account of inspection report published in various local dailies. It is the case on behalf of the Bank that the Bank had filed suits for recovery of the amount due to the Bank against the respondents No. 5 and 6 and other group companies before the learned Board of Nominees and they obtained the decree against them against which appeals are filed before the Cooperative Tribunal, however no stay has been granted in the said appeals. So far as respondents No.6 is concerned, the appeals filed by them came to be dismissed. It appears that in the meantime the RBI issued a letter addressed to the SCA/14061/2005 8/32 JUDGMENT Chief Secretary of all the States proposing guidelines of dues relating to Non-Performing Assets of Primary Urban Cooperative Banks, popularly known as 'OTS Scheme' and according to the petitioner Bank the coverage of the said OTS scheme was not to cover cases of willful default, fraud and malfeasance and loans availed of and guaranteed by the Directors of respective cooperative institutions and as per the additional guidelines the cut-off limit was to be based on either loans outstanding or on Working Capital of the Bank or its deposits as on 31st March 2001; Non-Performing Assets were required to be classified as default or last assets as on 31st March 1998; the scheme was to remain in operation upto 31st June 2002; and applications received upto 31st June 2002 were required to be processed and decided at the earliest and not later than 30th September 2002. It appears from the record that on 28th June 2002 suits were already decreed and it is the case of the Bank that without prejudice the proposal was received by the Bank from the respondent No.5 for benefit of OTS Scheme and the said application/proposal was marked to the RBI also. It is the case of the Bank that none of the details as regards the discrepancies found in the inspection reports of the RBI was pointed out in the application which would classify the case of the respondent No.5 as being one of the cases of willful default, malfeasance and fraud and therefore the Manager, Urban Banks Department of the RBI who was sent copy of the proposal of the respondent No.5 without recording reasons, advised SCA/14061/2005 9/32 JUDGMENT the respondent No.5 to approach the Registrar, Cooperative Societies since the scheme as was announced was not applicable. It is the case of the petitioner Bank that taking advantage of that letter the respondent No.5 approached the Registrar, Cooperative Societies on 26th July 2002 and on 13.12.2002 another proposal without prejudice was received and the said proposal was followed by another proposal dated 7.1.2004. In the meantime, by letter/communication dated 21st March 2003 the Registrar, Cooperative Societies, State of Gujarat, informed all the Banks with regard to granting permission for acceptance of OTS guidelines of the RBI. It is the case of the Bank that even as per the said acceptance, the said OTS Scheme was not to be made applicable to the cases of willful default, fraud, malfeasance and loans availed of or guaranteed by directors or by close relatives of the directors or by firms/companies/institutions in which the directors are interested or by ex-directors of respective Urban Cooperative Banks. That thereafter the Bank sought clarification/opinion of the District Registrar, Cooperative Societies with regard to the application submitted by the respondent No.5 for granting benefit of OTS and the District Registrar, Cooperative Societies by letter dated 6.1.2003 clearly opined that so far as the accounts of the respondents No. 5 and 6 and other group companies benefit of the scheme should not be extended and accordingly the respondent No.5 was informed by letter dated 13.1.2003 that it was not possible to SCA/14061/2005 10/32 JUDGMENT agree to the proposal of OTS Scheme. It is the case of the Bank that even the Joint Registrar (Audit), Cooperative Societies also informed the District Registrar, Cooperative Societies vide communication dated 27/28th January 2003 pointing out that the benefit of OTS Scheme was not extendable to the loans availed of or guaranteed by the Directors or by their close relatives and other companies. It appears that thereafter the said scheme was extended vide communication dated 22nd April 2004 to 30th July 2004, and on 30th July 2004., i.e., on the last day, an application was given by the respondent No.5 to the Registrar, Cooperative Societies, and according to the Bank, respondent No.5 is highly influential with high political connections. It is the case of the Bank that though earlier the Registrar had clearly opined to the District Registrar as stated above that the benefit of OTS Scheme was not applicable in the cases like respondents No. 5 and 6, surprisingly by letter dated 13th September 2004, the General Manager of the Bank was called by the Registrar for discussions with necessary record on 20th September 2004 and the General Manager of the Bank being a subordinate officer remained present with the necessary records and it was pointed out that as per the user account as on 30th September 2004 amount of Rs. 8,89,51,008.83 ps., was due and outstanding in various 8 group companies and if calculated as per OTS Scheme the amount recoverable would be Rs. 4,49,81,221.83 ps., and thus the Bank would suffer loss by foregoing Rs. 4,39,00,000/-. It is the case SCA/14061/2005 11/32 JUDGMENT of the petitioner that thereafter nothing was done as the scheme was not applicable to the case of respondents No. 5 and 6 and other group companies. However, surprisingly by letter dated 29.10.2004 the Bank was informed that the Office of the Registrar had received applications for extension of benefit under the OTS from amongst respondents No. 5 and 6 and the Bank was called upon to furnish details and the said communication was sent by Fax, and as per the Bank undue haste was shown by calling for details presumably because the scheme was coming to an end on 31st October 2004 and according to the Bank the wordings of the said communication dated 29.10.2004 was indirectly directing the office bearers of the Bank to agree to what the Registrar was proposing to do, and thereafter the Bank was constrained to agree to extending the benefit of OTS Scheme to respondents No. 5 and 6 and other group companies by Registrar, Cooperative Societies and the Bank had no option but to send such letter which was provided along with the resolution. According to the petitioner Bank the resolution clearly pointed out that this was subject to the Bank's policy to implement the scheme in the manner which was applied to other such N.P.A. accounts, and the said communication was dated 30th October 2004 and on the same date, i.e., the date on which the Bank replied, the Registrar, Cooperative Societies, State of Gujarat in a hurry to pass orders in favour of the respondents No. 5 and 6 and other group of companies passed the impugned order dated 30th October 2004, without recording any reasons, SCA/14061/2005 12/32 JUDGMENT directing the Bank that the Registrar had granted sanction to extension of OTS Scheme to the respondents No. 5 and 6 and one another Dahyalal Shah who is also a former Director. It is required to be noted that '31st October 2004' was the last day for deciding the application of OTS Scheme and therefore every thing was concluded within two days, i.e., 29.10.2004 and 30-10-2004 and as per the Bank if the benefit of the OTS is extended to the respondents No. 5 and 6 and another there will be loss of more than Rs. 6 to 7 crores to the Bank as according to the Bank outstanding amount as per the judgment and award passed by the Board of Nominees and which is due and payable by the respondents No. 5 and 6 and another is Rs. 11,13,17,575 as on 30th September 2005 and against which if the benefit of the OTS Scheme is extended to the respondents No. 5 and 6 and one another, they are required to pay only Rs. 4,49,81,221.83 ps. Therefore being aggrieved and dissatisfied with the above communication/decision/order dated 30th October 2004 of the Registrar, Cooperative Societies extending the benefit of OTS Scheme to respondents No. 5 and 6 and one another and virtually directing the Bank to accept the same and extend the benefit of OTS Scheme to respondents No. 5 and 6 and another inspite of the judgment and decree in favour of the Bank and inspite of the fact that the Bank is in a position to recover the entire amount from the securities/guarantees/properties mortgaged with the Bank of the respondents No. 5 and 6 and another and their guarantors, the Bank has preferred the present SCA/14061/2005 13/32 JUDGMENT Special Civil Application under Article 226 of the Constitution of India. 5. Shri Harin P. Raval, learned advocate appearing on behalf of the petitioner has in support of his above submissions has submitted that OTS Scheme of RBI accepted by the State Government is not mandatory and in an appropriate case the Bank in the interests of the Bank as well as public at large may refuse to give benefit of OTS Scheme more particularly when it is found by the Bank that they are in a position to recover the amount. He has further submitted that the benefit of OTS Scheme is not applicable to the cases of respondents No. 5 and 6 and another inasmuch as the scheme is not made applicable to the cases of willful default, fraud and malfeasance and the loans availed of or guaranteed by the Directors or by close relatives of the Directors or by firms/companies/institutions in which the Directors are interested or by ex-Directors of respective Urban Cooperative Banks. It is submitted that the respondent No.5 was the Chairman at the relevant time and respondent No.6 was Director of the Bank and the Inspection Report of the RBI clearly suggests that the finance obtained by the respondents No. 5 and 6 and another group companies was by fraud and malfeasance and therefore the Registrar of Cooperative Societies has materially erred in accepting the proposal of the respondents No. 5 and 6 for OTS Scheme and thereby directing the petitioner to accept the same. It is also further submitted by SCA/14061/2005 14/32 JUDGMENT him that the Registrar has misinterpreted Clause 7 of the Revised Guidelines/OTS Scheme of Non-Performing Assets as made applicable to the Primary Urban Cooperative Banks inasmuch as Clause 7 confers powers upon Registrar to make deviation for any borrower, but this power cannot be so exercised so as to make scheme inapplicable to persons or borrowers for whom there is specific exclusion. He has further submitted that the decision of the Registrar of Cooperative Societies taken on the last date of closing of the OTS Scheme, i.e., on 30th October 2001 speaks volumes about malafide intention on the part of the Registrar, Cooperative Societies and the State Government as the decision came to be taken within the period of two days only, i.e., on 29.10.2004 and 30.10.2004 more particularly when earlier the District Registrar, Cooperative Societies and the Registrar, Cooperative Societies (Audit) had already taken a decision informing the petitioner that the cases of respondents No. 5 and 6 and another are not covered by OTS Scheme. He has further submitted that in fact there are already judgment and awards passed by the learned Board of Nominees against respondents No. 5 and 6 and another persons and in favour of petitioner Bank and even proceeding under Securitisation Act are already initiated against respondents No. 5 & 6 and at present properties worth more than Rs. 7 to 8 crores are under attachment of the petitioner Bank and therefore the petitioner is in a position to recover the entire amount and therefore it is requested to quash and set aside the SCA/14061/2005 15/32 JUDGMENT order passed by the Registrar, Cooperative Societies granting approval to extend the benefit of OTS Scheme and directing the petitioner to accept the same and allow the present Special Civil Applications as prayed for. 5.1. Shri Raval, learned advocate appearing on behalf of the petitioner has relied upon the unreported Judgment of this Court rendered in Special Civil Application No. 15530 of 2004 dated 8.4.2005 and Special Civil Application No. 16901 of 2004 dated 12.7.2005 as well as the judgment of the Karnataka High Court in the case of E. Sathyanarayanan Vs.Reserve Bank of India and Another, reported in 112 Company Cases Page 272 and the judgment of the Allahabad High Court in the case of Sardar Prem Singh Vs. Bank of Baroda, reported in 2004 (3) CCC 165 (All.) in support of his submission that guidelines of RBI for recovery of non-performing assets do not confer any right of a party to get one time settlement and the guidelines are purely administrative instructions. He has further submitted that this Court in aforesaid two Special Civil Applications has already taken a decision that it is not mandatory for the bank to grant and extent the benefit of one time settlement. 6. Shri Kamal B. Trivedi, learned Additional Advocate General appeared on behalf of Registrar, Cooperative Societies, State of Gujarat, Shri Amar SCA/14061/2005 16/32 JUDGMENT Bhatt, learned advocate appeared on behalf of the RBI, and Shri ND Nanavati, learned Senior Advocate appeared on behalf of respondents No. 5 and 6. 7. At the time of hearing of the present Special Civil Applications, Shri Kamal B. Trivedi, learned Additional Advocate General had made a statement before the Court that the direction issued by the Registrar, Cooperative Societies, State of Gujarat, extending the benefit of OTS Scheme in favour of respondents No. 5 and 6 and another and the direction directing the Bank to accept the OTS Scheme is not mandatory and is not binding upon the Bank, and it will be ultimately for the concerned Bank to take appropriate decision on the basis of such decision taken by the Registrar, in the interests of the Bank and public at large. In view of the above statement made by the learned Additional Advocate General, now the only issue which requires to be decided is whether the direction issued by the Registrar, Cooperative Societies with regard to the OTS Scheme is to be acted upon by the Bank or not, and the main controversy