Case: Reserve Bank of India Vs. M. Hanumaiah and Ors

On inspection of Kalidasa Cooperative Bank Ltd. (respondent No.16) (hereinafter referred to as the ‘Cooperativemade on June 30, 1994 under Section 35 read with Section 56 of the Banking Regulation Act the Reserve Bank of India (the appellant before us) found a number of serious irregularities in its affairs. It sent a copy of the inspection report to the Cooperative Bank and called the members of its board of directors for discussion on the findings in the report. It also forwarded a copy of the inspection report to the Joint Registrar, Cooperative Societies. The Joint Registrar advised the Reserve Bank to make requisition for supersession of the committee of management of the Bank. The Reserve Bank, however, withheld any action in that regard but called the members of the board of directors of the Bank for several rounds of discussions at different levels. The board of directors was repeatedly urged to take stringent actions to improve the financial health of the Bank. Apparently, no remedial measures were taken and the affairs of the Cooperative Bank continued in a state of financial distress. Finally, the Reserve Bank issued a requisition to the Registrar Cooperative Societies, Karnataka on January 22, 2002 requiring him to supersede the board of directors of the Cooperative Bank and to appoint an Administrator for a period of one year as provided under Section 30(5) of the Karnataka Cooperative Societies Act. The requisition was made in public interest and for preventing the affairs of the Bank being conducted in a manner detrimental to the interest of the depositors and for securing proper management of thecompliance with the requisition made by the Reserve Bank the Registrar Cooperative Societies issued an order on January 31, 2002 superseding the board of directors of the Bank and appointing an Administrator in its place. The order of supersession issued by the Registrar was challenged before the Karnataka High Court by respondents 2 to 13 (members of the committee of management of the Cooperative Bank that was in existence at that time) in W.P.No.6706 of 2003 (CS-RES). The writ petition was allowed by a learned Single Judge of the Court by order dated September 21, 2002.

Court's reasoning:
the question (framed in the beginning of the judgment) in the negative and hold and find that on receipt of a requisition in writing from the Reserve Bank of India the Registrar Cooperative Societies is statutorily bound to issue the order of supersession of the committee of management of the cooperative bank. At that stage the affected bank/its managing committee has no right of hearing or to raise any objections. The question may here arise whether the principles of natural justice are completely excluded from the process or it may be that against the requisition, the affected bank may move the Reserve Bank itself and try to show that it had wrongly arrived at the decision for its supersession. The other course may be that after the supersession order was issued by the Registrar that may be challenged before a court of law and in that proceeding one of ground for assailing the order might be that the decision of the Reserve Bank was arrived at without giving the affected cooperative bank a proper opportunity of hearing. We, however, refrain from going into that question as it does not arise in the facts of the present case. In light of the discussions made above, both the orders passed by the learned Single Judge and the Division Bench appear quite untenable. Both the orders are accordingly set aside. However, since the matter has become quite old it needs to be clarified that the order of supersession passed by the Registrar on January 31, 2002 shall not be automatically revived but in case the Reserve Bank of India is of the opinion that the situation so warrants it may issue a fresh requisition to the Registrar Cooperative Societies, Karnataka, who would on that basis pass the order of supersession as held in the judgment.