Case: Rahuta Union Co-op. Bank Ltd &amp; Another Vs. Union of India &amp; Others

(iii) if at any time, any of the conditions referred to in Sub-section (3) and Sub-section (3A) is not fulfilled: Provided that before cancelling a licence under Clause (ii) or Clause (iii) of this sub-section on the ground tha the banking company has failed to comply with or had failed to fulfil any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interest of the companys depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such condition. (5) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government. (6) The decision of the Central Government where an appeal has been preferred to it under Sub-section (5) or of the Reserve Bank where no such appeal has been preferred shall be final. 3. SBL applied for a licence. It appears that RBI did not issue any notice informing SBL that the licence could not be granted. Thus SBL continued to carry on banking business by virtue of the proviso of Sub-clause (2). 4. In 1996 RBI pointed out certain operational deficiencies in the working of SBL. SBL was called upon to cure those deficiencies before the licence could be issued to it. Thereafter RBI advised SBL to raise additional capital to the extent of Rs. 50 crores by way of rights preferential issue. RBI made it clear that it would consider issue of a licence to SBL only after the capital was so raised. SBL managed to raise an extent of Rs. 15.18 crores, out of which approximately Rs. 5.80 crores was by means of diversion of SBLs own funds. In February-March, 1997 RBI conducted financial inspection of SBL and found several shortcomings and deficiencies in its functioning. 5. All the petitioners have deposited amounts in SBL. 6. In a special scrutiny conducted in 1998 RBI found that non-performing assets or bad debts were Rs. 58.26 crores, whereas provision was only Rs. 1.52 crores. This meant that SBL had incurred a net loss of Rs. 56.22 crores. Ultimately by a letter dated 15th December, 1998 RBI issued a show-cause notice to the Managing Director Shri A.M. Mustafi under Section 36AA(2) and pending reply prohibited him from acting as the Managing Director. In January, 1999 RBI removed Shri A.M. Mustafi and appointed three additional Directors on SBLs Board. Thereafter special audit was carried out. As a result of the audit the Government of India was informed about the poor state of affairs in SBL. The Government of India was informed that the funds had been siphoned out to the tune of Rs. 57.50 crores. 7. On 8th March, 1999, on the advice of RBI, the Government of India passed on order of Moratorium under Section 45(2) of the Act SBL filed a writ petition in the High Court of Sikkim challenging the order of Moratorium. However, the petition was dismissed on 2nd September, 1999. The special leave petition filed against the order has also been recently dismissed. 8. On 21st December, 1999 the Government of India issued an order notifying a scheme of amalgamation under Section 45(7) of the Act. By this scheme SBl was amalgamated with the Union Bank of India (for short UBI). Under the scheme all the depositors were to be paid on pro-rata basis. It is an admitted position that the depositors are only getting 9.037% of their deposits and they are required to surrender their fixed deposit receipts in return. 9. It was submitted that the scheme is contrary to the legislative mandate of Section 45 of the Act. It was submitted that the scheme was unrealistic and not capable of being implemented, as it has not kept the interest of the depositors in mind. It is submitted that there has been no proper audit of SBL. It is submitted that the values shown in the scheme are not the correct values and the schemes does not reflect the real financial position. It is submitted that the scheme was framed behind the back of the petitioners and no notice had been issued to them. It was also submitted that since no licence had been granted to SBL it could not be considered to be a Bank and therefore RBI had no powers to frame a scheme under Section 45 of the Act. It was further submitted that no serious efforts had been made to recover the debts and that, therefore, the interest of the depositors has not been taken care of. It was submitted that, therefore, this Court should set aside the scheme. 10. It was denied that the provisions of the Act have not been complied with and/or that suggestions of depositors were not considered before finalizing the scheme. It was denied that value shown in the scheme is not correct. It was submitted that all possible efforts have been made to recover amounts. 11. In our view, no rational ground of challenge to the scheme has been made out at all. A full audit has been carried out. The Scheme has taken into consideration all known assets of SBL. Efforts to recover debts have been made. However, even if there were no sufficient efforts of recovery that would not be a ground for setting aside the scheme. Section 22 sets out above permitted SBL to continue to operate as a Banking Company. Therefore, the provisions of the Act applied to it. 12. It must be mentioned that an offer was made to the petitioners that if they felt that there was no proper recovery the debts could be assigned to them in satisfaction of their dues and they could undertake recoveries. Knowing fully well that there was no feasibility of recovery, the offer was not accepted.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It is an admitted position that the depositors are only getting 9.037% of their deposits and they are required to surrender their fixed deposit receipts in return9. It was submitted that the scheme is contrary to the legislative mandate of Section 45 of the Act. It was submitted that the scheme was unrealistic and not capable of being implemented, as it has not kept the interest of the depositors in mind. It is submitted that there has been no proper audit of SBL. It is submitted that the values shown in the scheme are not the correct values and the schemes does not reflect the real financial position. It is submitted that the scheme was framed behind the back of the petitioners and no notice had been issued to them. It was also submitted that since no licence had been granted to SBL it could not be considered to be a Bank and therefore RBI had no powers to frame a scheme under Section 45 of the Act. It was further submitted that no serious efforts had been made to recover the debts and that, therefore, the interest of the depositors has not been taken care of. It was submitted that, therefore, this Court should set aside the scheme10. It was denied that the provisions of the Act have not been complied with and/or that suggestions of depositors were not considered before finalizing the scheme. It was denied that value shown in the scheme is not correct. It was submitted that all possible efforts have been made to recover amounts11. In our view, no rational ground of challenge to the scheme has been made out at all. A full audit has been carried out. The Scheme has taken into consideration all known assets of SBL. Efforts to recover debts have been made. However, even if there were no sufficient efforts of recovery that would not be a ground for setting aside the scheme. Section 22 sets out above permitted SBL to continue to operate as a Banking Company. Therefore, the provisions of the Act applied to it12. It must be mentioned that an offer was made to the petitioners that if they felt that there was no proper recovery the debts could be assigned to them in satisfaction of their dues and they could undertake recoveries. Knowing fully well that there was no feasibility of recovery, the offer was not accepted.