IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 10463 of 1995 For Approval and Signature: Hon'ble MR.JUSTICE R.BALIA. ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? YES 2. To be referred to the Reporter or not? YES 3. Whether Their Lordships wish to see the fair copy of the judgement? NO 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? NO 5. Whether it is to be circulated to the Civil Judge? NO -------------------------------------------------------------- BANASKANTHA DIST CENTRAL CO OPBANK LTD Versus STATE OF GUJARAT -------------------------------------------------------------- Appearance: MR TUSHAR MEHTA for Petitioner MS KUSUM M SHAH for Respondent No. 6 Mr. M.R. Anand, learned Government Pleader, with Ms. Harsha Devani, learned Assistant Government Pleader for respondents Nos. 1 to 3. -------------------------------------------------------------- CORAM : MR.JUSTICE R.BALIA. Date of decision: 08/04/96 ORAL JUDGEMENT Petitioner is a District Central Cooperative Bank Limited. By order dated 7th December 1995, respondent No.1, State of Gujarat, nominated Shri Hiralal Jagmal Joshi, Shri Hathibhai Chelabhai Vaghela and Shri Parbatbhai S. Patel as members of the Committee of the petitioner-Bank in exercise of its power under Section 80(1) of the Gujarat Cooperative Societies Act, 1961 ("Act" for short). This order dated 7th December 1995 (at Annexure "A" to the petition) is the subject matter of challenge in this Special Civil Application. It has been contended by the learned counsel for the petitioner that the condition precedent for exercise of power under Section 80(1) of the Act is that either the State Government has subscribed to the share capital of that society, whether directly or through another society, or must have guaranteed repayment of the principal of and payment of interest on, debentures issued by it or the State Government must have guaranteed repayment of the principal of and payment of interest on the loans raised by the society concerned. As none of the of the conditions exists in the present case, the State Government has no authority to nominate any member on the Committee of the petitioner-bank. It was also contended that it is not a case in which resort has been taken to exercise of power under sub-section (2) of Section 80 of the Act, inasmuch as, as per the law laid down by this Court, for exercise of power under sub-section (2) of Section 80 of the Act, the State Government is under obligation to afford an opportunity of hearing before nominating its representative on the Committee of any society in the public interest. So far as the second contention of the learned counsel for the petitioner about the action being not traceable to exercise of power under sub-section (2) of Section 80 of the Act is concerned, the respondents do not join issue. However, Mr. M.R. Anand, learned Government Pleader, contends that, from the facts and circumstances of the present case, it is apparent that the State Government stands in a position of guarantor for repayment of loan raised by the society. As per contention by its letter dated 26th September 1992, the National Bank for Agriculture and Rural Development ("NABARD" for short), established under the National Bank for Agriculture And Rural Development Act, 1981, (hereinafter referred to as "Act of 1981") had sanctioned a medium-term loan on account of failure of Kharif 1991 crops by extending credit limit upto 12443.04 lakhs to the State Cooperative Bank under Section 22 of the Act of 1981. Under clause (xi) of the said sanction letter, the State Cooperative Bank was entitled to draw on the above limit of Rs.12443.04 lakhs, to an extent not exceeding 60% of the amount actually converted amount of the due of the Societies affiliated to the concerned central cooperative banks and which are affected by conditions of famine/scarcity due to natural calamity of the evaluated financial assistance for assisting the famine affected areas. As per the Schedule appended, as regards the total base level conversion amount in respect of areas catered by the relevant district central cooperative banks respectively, separate amount was shown. It was stipulated that, while 60% of the required amount shall be contributed by the NABARD by way of credit facility to the State Cooperative Bank, balance 40% shall be provided by the State Government, State Cooperative Bank and concerned central cooperative bank in the ratio of 15%:10%:15%. Under clause (xii), it was stipulated that the State Cooperative Bank shall utilise the amount so withdrawn in such a manner that they are used by the concerned central cooperative bank only for advancing medium-term loans to affiliated primary credit societies mentioned in clause (xi) for enabling them to repay the short-term loans taken by them from the central cooperative banks for financing seasonal agricultural operations. It was further stipulated under clause (xiii) that the State Cooperative Bank shall ensure that the primary credit societies shall, in turn, advance medium term loans to their individual members only to enable them to repay the short-term loans taken by them from the said societies for financing seasonal agricultural operations. Under clause (xv), it was stipulated that separate accounts shall be maintained by the State Cooperative Bank and the central cooperative banks in respect of loans made or received by them for the purposes referred to in clause (xii) so as to distinguish them from all other loans or advances received or granted by them. It was further stipulated that the National Bank was authorized to depute its officers to inspect the State Cooperative Bank, the Central Cooperative Banks and the societies affiliated to them availing of or assisted by this accommodation. From the aforesaid terms and conditions of the loan sanction letter of the NABARD, it is urged that, if the scheme of loan is viewed in its proper perspective, it was a loan advanced to the District Central Cooperative Bank by NABARD through the agency of the State Cooperative Bank. To put it tersely, learned counsel contends that, under the said loan agreement, names of "District Central Cooperative Banks" were joined as principal debtors of NABARD with the State Cooperative Bank. With these premises, it is contended that the guarantee furnished by the State Government, vide annexure "I" dated 11th March 1993, is construed as guarantee by the State Government for repayment of loan raised by the District Central Cooperative Bank from NABARD. Hence, the basic condition required for exercise of power under Section 80(1) of the Act exists in the present case and the power has been validly exercised. In this connection, Ms. Shah, learned counsel appearing for respondent No.6, relying upon the affidavit-in-reply filed on behalf of the State Government, contended that the State Government has invested huge amounts in the Subsidiary State Partnership fund of the petitioner bank, balance of which at the end of 30th September 1995 was Rs.12.5 lakhs and the State Government has contributed to the share capital of primary agricultural cooperative societies, the amount of which has been routed through the District Cooperative Bank as per the provisons of the Act. It is further urged that, as a result of contribution by the State Government to the Subsidiary State Partnership fund, the State has indirect interest in the petitioner bank which is of financial character and therefore the State Government is competent to nominate its representatives on the Committee of the petitioner-Bank. Mr.Vakharia, learned counsel for the petitioner, in response, submits that, firstly, the State Government in no sense of words can be held as guarantor for repayment of loan raised for and on behalf of the petitioner-bank to put it in a position to nominate its representatives on the Committee of the petitioner, as guarantor for repayment of any loan raised by the petitioner and for payment of interest thereon. Secondly, at any rate, even if it is accepted that two documents relied on by the learned Government Pleader constitute indirect guarantee by the State Government for repayment of loan referred to in the sanction letter dated 26th September 1992 which was to be made available to the petitioner-bank by the State Cooperative Bank. The loan in its entirety was repaid on 21st November 1993 though last instalment was to be paid in June 1996. After payment of principal sum, and interest amount thereon to the State Cooperative Bank from whom the petitioner-Bank has raised loan, no amount of loan or interest thereon remains payable by the petitioner Bank for which relationship of guarantor and principal debtor could exist between the State and the petitioner-Bank. Therefore, even if the State Government can be said to be guarantor for repayment of loan or credit facilities which were made available to the State Cooperative Bank by NABARD, guarantee in so far as the petitioner-bank is concerned was only restricted to the extent of loan borrowed by it and interest thereon and no obligation as guarantor vis-a-vis petitioner-bank for repayment of loan by the petitioner existed after repayment of loan and interest by the petitioner to the State Cooperative Bank. That was the position according to the learned counsel for the petitioner which came into existence way back in November 1993 when the question of nominating members by the State Government on the Committee of the petitioner-society was not at all in contemplation. It was also urged that by contribution to Subsidiary State Partnership fund to be operated by the petitioner-bank, the State could at best be said to have subscribed share capital of primary societies only but by contributing either to the Subsidiary State Partnership Fund or Principal State Partnership Fund, the State does not become subscriber to the share capital of the petitioner-society directly or through such contribution inasmuch as it is nobody's case that any shares of the petitioner-society has been acquired by another society out of that fund. As a subsidiary limb of this contention, it was also urged that the District Central Cooperative Bank having repaid or returned the amount to the State Cooperative Bank, from which it has received the amount, it was under no obligation to oversee the function of the State Cooperative Bank for repayment of the amount by the State Cooperative Bank to the NABARD. If the State Cooperative Bank has not repaid the amount received from the District Central Cooperative Bank to NABARD, it cannot be construed as continuance of any liability on the part of the District Central Cooperative Bank in respect of repayment of that loan, and all sureties executed for and on behalf of the repayment of that loan by theCentral Cooperative Bank stand discharged no sooner the amount is repaid by the District Central Cooperative Bank to the State Cooperative Bank. I have carefully considered the rival contentions and perused records and materials placed before me. It would be appropriate to refer to the relevant provisions of the Gujarat Cooperative Societies Act, 1961 and the National Bank for Agriculture and Rural Development Act, 1981. to which reference has been made during the course of arguments. "Gujarat Cooperative Societies Act, 1961 80. Power to appoint government nominee:- (1) Where the State Government has subscribed to the share capital of a society, directly or through another society, or has guaranteed the repayment of the principal of and payment of interest on, debentures issued or loans raised by a society, the State Government shall, notwithstanding anything contained in the bye-laws of such society, have the right to nominate three representatives on the Committee of such society, in such manner as may be determined by the State Government from time to time. The members so nominated shall hold office during the pleasure of the State Government, or for such period as may be specified in the order by which they are appointed, and any such member on assuming office shall have all rights, duties, responsibilities and liabilities as if he were a member of the committee duly elected. Explanation: Any nomination of the Registrar or his nominee on the Committee of a society under the bye-laws of such society shall not be construed as nomination of the representative on that Committee in exercise of the right of the State Government under this sub-section. (2) Where the State Government is of the opinion that having regard to the public interest involved in the operation of society it is necessary or expedient so to do, it may nominate its representatives on the committee of such society as if the State Government had subscribed to the share capital of the society and the provisions of sub-section (1) shall, so far as may be apply to such nomination." National Bank for A & R. Development Act, 1981 Chapter VI CREDIT FUNCTION OF THE NATIONAL BANK 21. Production and marketing credit:- (1) The National Bank may provide by way of refinance, loans and advances, repayable on demand or on the expiry of fixed periods not exceeding eighteen months, to State cooperative banks, regional rural banks, or to any financial institution or to any class of financial institutions, which are approved by the Reserve Bank in this behalf, for financing - (i) agricultural operations or the marketing of crops, or (ii) the marketing and distribution of inputs necessary for agriculture or rural development, or (iii)any other activity for the promotion of or in the field of agriculture or rural development, or (iv) bond fide commercial or trade transactions, or (v) the production or marketing activities of artisans or of small-scale industries, industries in the tiny and decentralised sector, village and cottage industries or of those engaged in the field of handicrafts and other rural crafts. (2) The National Bank may make loans and advances under sub-section (1) against the security of - (i) stocks, funds and securities other than immovable property, in which a trustee is authorized to invest trust money by any law for the time being in force. (ii) promissory notes supported by documents of title to goods, such documents having been transferred, assigned or pledged to the borrowing institution as security for a loan or advance made for any of the purposes specified in sub-section (1): Provided that the National Bank may, whenever it considers it necessary so to do, accept, in lieu of the actual assignment of any such security in favour of the National Bank, a declaration in writing from the borrowing institution,- (a) stating that it holds such documents of title to goods as may be set out in the declaration; and (b) containing such other particulars as may be required by the National Bank. (3) Notwithstanding anything contained in sub-section (2), the National Bank may in its discretion grant a loan or advance- (1) to any State Cooperative bank if the loan or advance is fully guaranteed for repayment of principal and interest by Government; (b) to any State cooperative bank which is a scheduled bank, if the loan or advance is secured either by a bill of exchange or promissory note executed by the central cooperative bank and assigned in favour of the State Cooperative Bank. (4) Notwithstanding anything contained in sub-sections (2) and (3), the National Bank may also make loans and advances repayable on demand or on the expiry of fixed periods not exceeding eighteen months against promissory notes of a State cooperative bank or a regional rural bank or an institution approved under sub-section (1); Provided that the borrowing institution furnishes a declaration in writing, setting out the purpose for which it has made loans and advances and such other particulars as may be required by the National Bank. 22. Conversion loan for production credit- . Where the National Bank is satisfied that owing to drought, famine or other natural calamities, military operations or enemy action, any State Cooperative bank, regional rural bank or any such financial institution or any financial institution falling under any such class of financial institutions, as may be approved by the Reserve Bank in this behalf, requires assistance under this section, it may provide to such bank or institution such financial assistance as it may deem fit by way of making loans and advances repayable on the expiry of fixed periods not exceeding seven years and on such terms and conditions as may be specified in this behalf by the National Bank. Provided that loans and advances may be made under this section only for the purpose of enabling the borrowing bank or institution,- (i) to pay any dues to the National Bank for credit extended for financing agricultural operations or the marketing of crops under clause (i) of sub-section (1) of section 21, or (ii) to make to central cooperative banks or primary rural credit societies, loans or advances repayable on the expiry of fixed period not being less then eighteen months and not exceeding seven years, by way of reimbursement of loans and advances made by such cooperative banks or societies for agriculture or agricultural operations or for reimbursement of such loans or advances which have been converted into loans or advances repayable on expiry of fixed periods not being less than eighteen months and not exceeding seven years from the date of conversion: Provided further that no loan or advance shall be made under this section to a State cooperative bank unless such loan or advance is fully guaranteed as to the repayment of the principal and payment of interest, by the State Government." Reference to the aforesaid provisions is necessary to construe the true import of transaction and its effect on the provisions of the Act, which authorise the State Government to nominate its representative on the Board of any society. It is paramount importance to notice that, primarily, in this petition we are concerned with the authority of the State Government to nominate its representative in addition to the elected members on the Committee of the cooperative society, which is governed by the provisions of the Act. Inter-responsibilities, liabilities and execution of scheme of the financial societies for the purpose of which the Act of 1981 was enacted are not the purport of this controversy. What are the respective rights in repayment and recovery of the amount in case the same are not paid, are not the concern of this discussion. At this stage, it may be noticed that, under the scheme of the Act it is not any and every kind of financial assistance or any and every financial interest, which the State Government may have, does not entail it to nominate its representative on the Committee of such a society. It is only confined to the financial interest which the Legislature had specified in the provision conferring power on the State.. it to exercise that power and no other interest outside that limit can confer that power on the State Government. In this connection, If one refers to refer to Chapter V of the Act which provides for State Aid to Societies, the first and foremost form of State Aid to societies is direct subscription to the share capital in the society. That is provided under Section 51 of the Act. Other form of State Aid to societies has been envisaged in the form of creation of Principal State Partnership Fund and Subsidiary State Partnership Fund for the purpose of indirect partnership of the State Government in the cooperative societies. Apart from these two provisions, Section 63 envisages other forms of State Aid to societies, which reads as under: "63. Other forms of St.. Notwithstanding anything contained in any law for the time being in force, but subject to such conditions as the State Government by general or special order may specify in this behalf, the State Government may,- (a) give loans to a society. (b) guarantee the payment of the principal of debentures issued by a society, or of interest thereon, or both, or the repayment of the share capital of a society to its members, or the payment of dividends thereon at such rates as may be specified by the State Government; (c) guarantee the repayment of the principal of and the payment of interest on, means given by a Cooperative Bank to a society; (d) guarantee the repayment of the principal.... payment of interest on, loans and advances given by the Reserve Bank of India, or the Industrial Finance Corporation of India, or any other authority constituted under any law for the time being in force, or (e) provide financial assistance, in any other form (including subsidies), to a society." It is, therefore, apparent that, under the Statute itself, widest possible amplitude of the financial assistance by the State is envisaged in the development of a cooperative society. While it can subscribe share capital by itself, it can subscribe share capital by purchasing shares in other societies through the apex society with the aid of Principal State partnership Fund or by purchasing shares in the primary societies through the central society with the aid of Subsidiary State Partnership Fund or the fund provided by apex society from the Principal State Partnership Fund in terms of Section 53(2)(b). Principal State Partnership Fund as well as Subsidiary State Partnership Fund can be utilised for other purposes also apart from purchasing shares as stated above in other societies. Apart from these two, there are other forms of State aid to societies, namely, the State Government may itself give loans to a society; it may guarantee the payment of the principal of debentures issued by a society, or of interest thereon, or both; it may also guarantee the repayment of the share capital of a society to its members, or the payment of dividends thereon at such rates as may be specified by the State Government; it may also extend financial aid to a society by standing guarantee for repayment of the principal of and the payment of interest on the amounts given by such cooperative society to another society, that is to say, not for repayment of loan received by the society itself, but for recovery of loan advanced by it in the situation where the State Government has subscribed directly to the share capital of a society (as envisaged under Section 51 of the Act) or through another society (as envisaged under Sections 53(2)(a) and 54(2)(a) of the Act) or where the State Government has guaranteed repayment of the principal of the debentures issued by a society (as envisaged by the first part of clause (b) of Section 63) and, lastly, where the State Government has guaranteed repayment of the principal of, and payment of interest on, loans and advances raised by a society governed by clause (d) of Section 63 of the Act. All the form of State financial assistance referred to in Section 80(1) are part of specific statutory provision under Chapter V, but such power under Section 80(1) does not extend to the entire sphere of financial assistance envisaged to be extended by the State. In view of these clear provisions, broad contention raised by the learned counsel for the nominated members that, merely because the State Government has contributed to the Subsidiary State Partnership Fund a substantial amount of Rs.12.5 lakhs for acquiring shares in other primary societies, the condition of State having financial interest within the meaning of Section 80(1) of the Act should be deemed to be in existence, cannot be accepted. What is required is subscription to the shares of society concerned by the State either directly or through other societies. From the averments made in the pleadings, it is apparent that the State Government has not subscribed directly to the share capital of the petitioner-society. It is not the case of anybody that, through contribution made to the Principal State Partnership Fund, the apex society had purchased shares of the petitioner-society. Subsidiary State Partnership Fund does provide that as regards moneys received by an apex society from the Principal State Partnership Fund, a central society shall utilise that fund only for the purpose of purchasing shares from the primary society and, according to the averments made