IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 337 of 2006 1. Ganesh Bank of Kurundwad Ltd. having its registered office at Kurundwad, Taluka Shirol, Dist. Kolhapur, Maharashtra 2. Ramesh Dattatray Gupte 3. Bapu Ramu Jong 4. Arvind Gangadhar Joshi 5. Vikas Vilas Patil 6. Mahesh Narayan Joshi .. Petitioners V/s 1. Union of India through Joint Secretary, Ministry of Finance, Department of Economic Affairs (Banking Division), New Delhi. 2. The Reserve Bank of India Fort, Mumbai. 3. Chief General Manager In-charge RBI, Cuffe Parade, Mumbai. 4. Federal Bank Ltd. having its office at Aluva, State of Kerala. 5. Federal Bank Ltd. Mumbai Regional Office, Mumbai. .. Respondents Mr.N.H. Seervai, Senior Advocate with Mr.G.S. Godbole for the Petitioners. Mr.B.A. Desai, Additional Solicitor General with Mr.Y.R. Mishra for Respondent No.1. Mr.Harish Salve, Senior Advocate with Dr.Virendra V. Tulzapurkar, Senior Advocate and Mr.Damle i/b M/s Udwadia & Udeshi for Respondents No.2 and 3. Mr.Virag V. Tulzapurkar, Senior Advocate with Mr.Indranil Deshmukh i/b Amarchand & Mangaldas & Suresh A. Shroff & Co. for Respondents No.4 and 5. - 2 - WITH WRIT PETITION (L) NO. 160 OF 2006 Sunil Mahadev Chavan .. Petitioner V/s 1. Reserve Bank of India 2. Federal Bank Ltd. 3. Ganesh Bank of Kurundwar Ltd. 4. Union of India. .. Respondents Mr.Vishwajeet Sawant for the Petitioner. Mr.Harish Salve, Senior Advocate with Dr.Virendra V. Tulzapurkar, Senior Advocate and Mr.Damle i/b M/s Udwadia & Udeshi for Respondent No.1. Mr.Virag V. Tulzapurkar, Senior Advocate with Mr.Indranil Deshmukh i/b Amarchand & Mangaldas & Suresh A. Shroff & Co. for Respondent No.2 . Mr.N.H. Seervai, Senior Advocate with Mr.G.S. Godbole for Respondent No.3. Mr.B.A. Desai, Additional Solicitor General with Mr.Y.R. Mishra for Respondent No.4. CORAM : H.L. GOKHALE & CORAM : H.L. GOKHALE & CORAM : H.L. GOKHALE & A.S. OKA, JJ. A.S. OKA, JJ. A.S. OKA, JJ. DATE OF RESERVING THE JUDGMENT : 3RD/9TH MARCH 2006 DATE OF RESERVING THE JUDGMENT : 3RD/9TH MARCH 2006 DATE OF RESERVING THE JUDGMENT : 3RD/9TH MARCH 2006 DATE OF PRONOUNCING THE JUDGMENT: 5TH APRIL 2006 DATE OF PRONOUNCING THE JUDGMENT: 5TH APRIL 2006 DATE OF PRONOUNCING THE JUDGMENT: 5TH APRIL 2006 JUDGMENT JUDGMENT JUDGMENT : (Per H.L. Gokhale, J.) 1. The first of these two petitions is filed by a banking company regulated under the Banking Regulation Act, 1949 (hereinafter referred to as the - 3 - "petitioner-bank"). The second of these petitions is filed by an employee of the said bank. These two petitions seek to challenge the notification dated 7th January 2006 issued by the Government of India, Ministry of Finance imposing a moratorium in respect of the 1st Petitioner banking company for a period of 3 months from the date of order upto and inclusive 6th April 2006. Amongst others, it directs the said bank that it shall not without the permission in writing of the Reserve Bank of India grant any loan or advances or incur liability. The exception to this being withdrawal of sums not exceeding Rs.5,000/- by any savings bank or current account holder with a further relaxation to release an amount not exceeding Rs.10,000/- or the actual balance, whichever is less, in the event of certain difficulties such as medical treatment, higher education and obligatory expenses like marriage etc. The petitions seek to challenge the order dated 7th January 2006 issued by the Reserve Bank of India appointing two directors on the Board of Directors of the said bank. It further seeks to challenge the notification dated 9th January 2006 proposing a scheme of amalgamation of this bank into the Federal Bank, another private sector commercial bank, and then finally the order dated 24th January 2006 sanctioning the amalgamation of this bank with the Federal Bank. The Union of India, the Reserve Bank of India and the - 4 - Federal Bank are the contesting Respondents to these petitions. 2. The short facts leading to these petitions are this wise: . Ganesh Bank of Kurundwad Ltd. was founded sometimes in the year 1920 and is having a banking license given by the Reserve Bank of India (RBI). It has some 32 branches situated principally in Districts of Kolhapur and Sangli of Maharashtra and the adjoining Belgaum District of Karnataka. It has around 1,75,000 depositors in the rural areas of these three districts. 3. The case of the Petitioner-bank is that it was carrying on its activities smoothly and that it incurred losses only once and that was in the financial year 2004-05. That was also for the reasons which were beyond its control, viz. (i) that the value of the government securities, wherein it had made deposits, went down, and (ii) the provisioning norms set up by the RBI were made more stringent by it. It was on this background that suddenly it was shocked to receive the order of moratorium in the morning of 8th January 2006. It led to unnecessary long queue at its branch at Dadar, Mumbai though there was no run on the bank any time in the past or even on that day as such. Thereafter the - 5 - issuance of the moratorium and the decision of the RBI to take further steps was duly advertised. The Reserve Bank of India thereafter appointed two directors of its own on the Board of Directors of the Petitioner-bank on 7th January 2006. The RBI then notified the proposed scheme of amalgamating the Petitioner bank with the Federal Bank on 9th January 2006. The Petitioner bank objected to it by filing its objections on 23rd January 2006, yet a decision was taken by the RBI and the Central Government on 24th January 2006 sanctioning amalgamation of the Petitioner Bank with the Federal Bank. These decisions are challenged in these petitions. 4. After the two petitions were filed, an interim order came to be passed on 27th January 2006 by this Court. The counsel for the Petitioners were heard and so also those for the Central Government, the RBI and the Federal Bank. This Court noted that whereas the moratorium was declared on 7th January 2006, within two days i.e. on 9th January 2006 the RBI proposed the name of Federal Bank to take over the Ganesh Bank. It was not known as to how any such scheme was drawn in such a short time. Similarly, when the Petitioner bank had made a representation on 23rd January 2006, the decision to amalgamate was arrived at on 24th January 2006. Prima facie, the Court felt that the steps taken were - 6 - not appropriate and were taken in hurry. The Court therefore granted an interim injunction in terms of prayer (a)(iii) and (b)(ii) of the first petition thereby the operation and implementation of the order dated 24th January 2006 was stayed and the status quo, which existed prior to 24th January 2006, was restored. This Court, however, clarified that the moratorium will continue to operate and the two directors appointed by the RBI were also continued to function as the directors of the Petitioner bank. 5. This order was challenged by the RBI and the Federal Bank in an SLP to the Apex Court. The Apex Court by its order dated 30th January 2006 directed this Court to hear and decide these petitions on a day to day basis. The interim order passed by this Court was however left undisturbed. 6. Accordingly, the Respondents have filed their affidavits in reply and the Petitioners have filed their rejoinders. The Petitioners have amended their petitions also and further affidavits are filed by all the parties. The Respondents have relied upon the Reports of various Committees appointed by the Central Government and the RBI concerning the banking sector. A number of authorities were cited by the counsel appearing for all the parties. Thus, the pleadings were - 7 - completed and thereafter the matter was heard from day to day from 14th February 2006 to 3rd March 2006. The parties sought time to file their written arguments which were filed by the Petitioners, the RBI and the Federal Bank by 9th March 2006. The matter is being decided thereafter. 7. The principal submissions of the Petitioners are two-fold, namely that the order dated 7th January 2006 imposing moratorium and then the order dated 9th January 2006 appointing two directors are both malafide to suit the convenience of Federal Bank, ultra vires the powers of the RBI and the Central Government and, therefore, bad in law, illegal and void. Similarly, the other submission of the Petitioners is that the subsequent framing of scheme of amalgamation on 9th January 2006 and the decision to sanction the amalgamation taken on 24th January 2006 are motivated and preplanned decisions for the benefit of the Federal Bank, malafide and ultra vires the powers of the Central Government and the RBI. It is further submitted that both these decisions are not justified on facts and are arrived at without taking into consideration the relevant material. As far as the first decision imposing the moratorium is concerned, it is submitted that there were no good reasons to impose the same and, as far as the decision to amalgamate is concerned, it is submitted that the said decision was - 8 - without considering the proposals of four other banks which were better placed. 8. As against these submissions of the Petitioners, the defence of the RBI and the Central Government is that the Petitioner bank was undoubtedly in serious financial difficulties and it is, therefore, that the moratorium had to be imposed. The moratorium was fully justified on the facts of the case. The decision to amalgamate the Petitioner bank with the Federal Bank was arrived at in full compliance with the statutory requirements and after considering all material on record as well as the suggestions and objections from the Petitioner Bank and all concerned, and after examining the proposals from the other four banks. It is, therefore, submitted that there is no reason to interfere with the decision arrived at by the RBI and the Central Government which is essentially for the benefit of the depositors. It is submitted that the interest of the employees is taken care of and the interest of the shareholders will obviously come last. 9. In view of what is narrated above, principally two points arise for determination in these petitions. They are:- (A) Whether the decision dated 7th January 2006 of - 9 - the Central Government imposing moratorium and to appoint two directors was malafide, ultra vires the powers of the Central Government and the RBI, bad in law and void and unjustified on facts? (B) Whether the notification dated 9th January 2006 containing the proposed scheme of amalgamation and the decision to sanction the amalgamation dated 24th January 2006 were malafide, ultra vires the powers of the Central Government and the RBI and unjustified on facts? 10. To decide these two points raised in these petitions, we will have to refer to various provisions of the Banking Regulation Act, 1949 under which the impugned orders are passed. From amongst these sections, however section 45 is the key section. It will therefore be appropriate to note the provisions of this section in extenso. This section reads as follows:- 45. Power of Reserve Bank to apply to Central 45. Power of Reserve Bank to apply to Central 45. Power of Reserve Bank to apply to Central Government for suspension of business by a Government for suspension of business by a Government for suspension of business by a banking company and to prepare scheme of banking company and to prepare scheme of banking company and to prepare scheme of reconstitution of amalgamation reconstitution of amalgamation reconstitution of amalgamation.- - 10 - (1) Notwithstanding anything contained in the foregoing provisions of this Part or in any other law or any agreement or other instrument, for the time being in force, where it appears to the Reserve Bank that there is good reason so to do, the Reserve Bank may apply to the Central Government for an order of moratorium in respect of a banking company. (2) The Central Government, after considering the application made by the Reserve Bank under sub-section (1), may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper and may from time to time extend the period so however that the total period of moratorium shall not exceed six months. (3) Except as otherwise provided by any directions given by the Central Government in the order made by it under sub-section (2) or at any time thereafter the banking company shall not during the period of moratorium make any payment to any depositors or discharge any - 11 - liabilities or obligations to any other creditors. (4) During the period of moratorium, if the Reserve Bank is satisfied that- (a) in the public interest; or (b) in the interests of the depositors; or (c) in order to secure the proper management of the banking company; or (d) in the interests of the banking system of the country as a whole, it is necessary so to do, the Reserve Bank may prepare a scheme- (i) for the reconstruction of the banking company, or (ii) for the amalgamation of the banking company with any other banking institution (in this section referred to as "the transferee bank"). - 12 - (5) The scheme aforesaid may contain provisions for all or any of the following matters, namely:- (a) the constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and privileges, the liabilities, duties and obligations of the banking company on its reconstruction or as the case may be, of the transferee bank; (b) in the case of amalgamation of the banking company, the transfer to the transferee bank of the business, properties, assets and liabilities of the banking company on such terms and conditions as may be specified in the scheme; (c) any change in the Board of directors, or the appointment of a new Board of directors, of the banking company on its reconstruction or, as the case may be, of the transferee bank and the authority of whom, the manner in which, and the other terms and conditions on which, such change or appointment shall be made and in the case of appointment of a new Board of directors or of - 13 - any director the period for which such appointment shall be made; (d) the alteration of the memorandum and articles of association of the banking company on its reconstruction or, as the case may be, of the transferee bank for the purpose of altering the capital thereof or for such other purposes as may be necessary to give effect to the reconstruction or amalgamation; (e) subject to the provisions of the scheme, the continuation by or against the banking company on its reconstruction or, as the case may be, the transferee bank, of any actions or proceedings pending against the banking company immediately before the date of the order of moratorium; (f) the reduction of the interest or rights which the members, depositors and other creditors have in or against the banking company before its reconstruction or amalgamation to such extent as the Reserve Bank considers necessary in the public interest or in the interest of the members, depositors and other creditors or for the - 14 - maintenance of the business of the banking company; (g) the payment in cash or otherwise to depositors and other creditors in full satisfaction of their claim- (i) in respect of their interest or rights in or against the banking company before its reconstruction or amalgamation; or (ii) where their interest or rights aforesaid in or against the banking company has or have been reduced under clause (f), in respect of such interest or rights as so reduced. (h) the allotment to the members of the banking company for shares held by them therein before its reconstruction or amalgamation whether their interest in such shares has been reduced under clause (f) or not, of shares in the banking company on its reconstruction or, as the case may be, in the transferee bank and where any members claim payment in cash and not allotment of shares, or where it is not possible to allot shares to - 15 - any members, the payment in cash to those members in full satisfaction of their claim- (i) in respect of their interest in shares in the banking company before its reconstruction or amalgamation; or (ii) where such interest has been reduced under clause (f) in respect of their interest in shares as so reduced; (i) the continuance of the services of all the employees of the banking company (excepting such of them as not being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947), are specifically mentioned in the scheme) in the banking company itself on its reconstruction or, as the case may be, in the transferee bank at the same remuneration and on the same terms and conditions of service, which they were getting, or as the case may be, by which they were being governed, immediately before the date of the order of moratorium: - 16 - Provided that the scheme shall contain a provision that- (i) the banking company shall pay or grant not later than the expiry of the period of three years from the date on which the scheme is sanctioned by the Central Government, to the said employees the same remuneration and the same terms and conditions of service as are, at the time of such payment or grant, applicable to employees of corresponding rank or status of a comparable banking company to be determined for this purpose by the Reserve Bank (whose determination in this respect shall be final); (ii) the transferee bank shall pay or grant not later than the expiry of the aforesaid period of three years, to the said employees the same remuneration and the same terms and conditions of service as are, at the time of such payment or grant, applicable to the other employees corresponding rank or status of the transferee bank subject to the qualifications and experience of the said employees being the same as or equivalent to those of such other employees of the transferee bank; - 17 - . Provided further that if in any case under clause (ii) of the first proviso any doubt or difference as to whether the qualification and experience of any of the said employees are the same as or equivalent to the qualifications and experience of the other employees of corresponding rank or status of the transferee bank the doubt or difference shall be referred, before the expiry of a period of three years from the date of the payment or grant mentioned in that clause, to the Reserve Bank whose decision thereon shall be final; (j) notwithstanding anything contained in clause (i) where any of the employees of the banking company not being workmen within the meaning of the Industrial Disputes Act, 1947 (14 if 1947), are specifically mentioned in the scheme under clause (i) or where any employees of the banking company have by notice in writing given to the banking company, or, as the case may be, the transferee bank at any time before the expiry of the one month next following the date on which the scheme is sanctioned by the Central - 18 - Government, intimated their intention of not becoming employees of the banking company on its reconstruction or, as the case may be, of the transferee bank, the payment to such employees of compensation, if any, to which they are entitled under the Industrial Disputes Act, 1947, any such pension, gratuity, provident fund and other retirement benefits ordinarily admissible to them under the rules or authorisations of the banking company immediately before the date of the order of moratorium; (k) any other terms and conditions for the reconstruction or amalgamation of the banking company; (l) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out. 6(a) A copy of the scheme prepared by the Reserve Bank shall be sent in draft to the banking company and also to the transferee bank and any other banking company concerned in the amalgamation, for the suggestions and objections, - 19 - if any , within such period as the Reserve Bank may specify for this purpose. (b) The Reserve Bank may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the banking company and also from the transferee bank, and any other banking company concerned in the amalgamation and from any members, depositors or other creditors of each of those companies and the transferee bank. (7) The scheme shall thereafter be placed before the Central Government for its sanction and the Central Government may sanction the scheme without any modifications or with such modifications as it may consider necessary, and the scheme as sanctioned by the Central Government shall come into force on such date as the Central Government may specify in this behalf; . Provided that different dates may be specified for different provisions of the scheme. (7A). The sanction accorded by the Central Government under sub-section (7), whether before or - 20 - after the commencement of section 21 of the Banking Laws (Miscellaneous Provisions) Act, 1963 (55 of 1963) shall be conclusive evidence that all that requirements of this section relating to reconstruction, or, as the case may be, amalgamation have been complied with and a copy of the sanctioned scheme certified in writing by an officer of the Central Government to be a true copy thereof, shall, in all legal proceedings (whether in appeal or otherwise and whether instituted before or after the commencement of the said section 21), be admitted as evidence to the same extent as the original scheme.) (8) On and from the date of the coming into operation of the scheme or any provision thereof, the scheme or such provision shall be binding on the banking company, or, as the case may be, on the transferee bank and any other banking company concerned in the amalgamation and also on all the members, depositors and other creditors and employees of each of those companies and of the transferee bank, and on any other person having any right or liability in relation to any of those companies or the transferee bank including the trustees or other persons managing, or connected in any other manner with, any provident fund or other - 21 - fund maintained by any of those companies or the transferee bank. (9) (On and from the date of coming into operation or, or as the case may be, the date specified in this behalf in, the scheme), the properties and assets of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and vest in, and the liabilities of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and become the liabilities of the transferee bank. (10) If any difficulty arises in giving effect to the provisions of the scheme, the Central Government may by order do anything not inconsistent with such provisions which appears to it necessary or expedient for the purpose of removing the difficulty. (11) Copies of the scheme or of any order made under sub-section (10) shall be laid before both Houses of Parliament, as soon as may be, after the scheme has been sanctioned by the Central Government, or, as the case may be, the order has been made. - 22 - (12) Where the scheme is a scheme for