I96Z s1; dr; J;;; rd M tnU}aeturing Co. . v. "G'obind

v,;;:;~J;

March 7.

632 Sl)'PREl\lE COURT RE; E'ORTS [1962] SUPP.

This being the only'poin~ on whioh the labour court had refued to give approval, the appeal mst suc'ceed. We therefore allow the appeal, .set.aside

the order of the labour court and approve the action taken by 'the appellant. In the circumstances we pass na order as to costs.

{l.ppool allowed.

JOSEPH KURUVILLA •VELLUKUNNEL

THE RESERVE BANK OF INDIA AND OTHERS

(With connected petition)

Banking Companies-Winding up-Enactment providing for an order for winding up by High Court on the basis of

Reser11e Bank's opinion-Constitutional validity-Banking Companies Act, 1949 (10 of 1949), ss. 2, 35, 35A, 36, 38- -Reserve Bank of India Act, 1934 (2 of 1934), ss. 7, 8, 38- Companies Act, 1956 (I of 1956), ss. 433, 450(2)-Constitution of Inaia, Arts. U, 19(1)( f) and (g), 301, 302. ·

Subsection (l) of s. 38 of the Banking Companies Act, 1949, provided : '1Notwithstanding anything contained in ss. 391, 392, 433 and 583 of the Companies Act, 1956 .... the High Court shall order the win'ding 'up for a banking company . ... if an application for its winding up has been made by the Reserve Bank under s. 47 of this .section."

Under s. 38(b)(iii) of the Act .''the Reserve Ban'k may make an application under this section for the winding up of a banking company• if in the opinion of the Reserve Bank the . 1 continuance of the banking company is prejudicjal to the interests of its depositors."

 rn exercise of, the p9wers vested in it by the Banking companies Act, 1949, as w'ell -as the Reserve Bank of India Act, 1934, the Reserve Bank had been inspecting the Palai Central Bank Ltd., periodically, and had been warning the Bank that its business was being .conducted in a manner detrimental to the .interest of its depositoi-s.

In June 1960, there was a run on several branches of the Bank.

The Reserve Bank was of the opnion that the Palai Bank was not jn a positipn to fay its depositors in f'lll and h11t lhr

3 S.C.R.

SUPREME COURT REPORTS 633

continuance of the Bank was prejudicial to the interest of the depositors.

On August 8, 1960 the Reserve Bank made an application in the High Court of Kerala under s. 38(3)(b)(iii) of the Banking Companies Act, 1949, read with the Companies Act, 1956, for the winding up of the Palai Central Bank Ltd.

After hearing the Reserve Bank, the Palai Bank and the creditors, the High Court passed an order allowing the application of the Reserve Bank, and directing the winding up of the Palai Bank.

It was contended for those who opposed the application that ss. 38(1) and 3(b) (iii) of the Banking Companies Act contravened Arts. 14 and 19 (!) (f) and (g) of the Constitution of India and, therefore were void because (a) they permitted discrimination between a banking company and any other company by prescribing different laws for their respective winding up, (b) they created an unreasonable restriction upon the right lo carry on banking and ( c) the whole procedure was denial of the principles of natural justice chiefly by denying an acess to courts, inasmuch as under s. 433 of the Compames Act, 1956, when an application was made to wind up a company, the High Court had to be satisfied after a fair trial that an order to wind up the company was called for, and the Judge was free to reach a decision after the company had sho\vn cause, and there was a right of appeal against the decision if adverse to the company, while under the procedure laid down in s. 38 of the Banking Companies Act, 1939, the Reserve Bank was made the sole judge to decide whether the affairs of a banking company were being so conducted as to be prejudicial to the interests of the depositors, and the court had no option but to _an order winding up the bankh:; g company, when the.application was made.

It was also contended that ss. 38(1) and 3(b)(iii) were ultra vires being in conflict with Art. 301 of the Constitutipn.

Held, (Kapur and Shah, JJ;, dissenting), that ss. 38(1) and (3) (b)(iii) of the Banking Companies Act, 1939, did not offend of Arts. 19( I) (f)' and (g) of the Constitution of India and were valid.

In view of the history of the establishment of the Reserve Bank as a Cntral Bank for India, its position as a Bankers Bank, its control over banking companies and banking in India, its position as the issuing -bank, its power to license banking companies and cancel thei~ licences and the numerous powers, a law which empowered the Reserve Bank to come to a decision to wind up a tottering or unsafe banking company fo the interest of the depositors could not be challenged '\S

19o2

Joseph Kuruvilla

VeUukwmet

The Rese1ve Bank

oj lndia

Jouph Kt"i; f.ti[l,,

Y elluAunne(

v r1ie Uenerue B,; nk vf Jndia

634 SUPREME COURT REPORTS [1962) SUPP.

unreasonable, because even if the court were called upon to take in_in_iediate action it would almost always be guided by the op1n1on of the Reserve Bank. 1\ law may, with reason, leave the detcrminati')n of an iss11e to an expert body and such law is justified 011 the ground of expediency arising fro; n the respective opportunities for action.

The exclusion of courts is however not to be lightly inferred or conceded.

Held, further (per Sinha, C.J., Hidayatullah and Mudholkar, JJ.), that : ( 1) while ordinary companies dealt with the money of the stock holders, banking companies were in a different class as they dealt with the money of the depositors and had to be regulated differently ; and the Reserve Bank

having been given by the Banking Companies Act the power and invested with the duty of watching the affairs, of every hanking cornpany with a vievi to ensuring the safety of the depositors' money, there "'as a valid clas.c; ification ; consequently ss. 38(1) and (3)(b)(iii) of the Banking Companies Act did not offend Art. 14 of the Comtitution.

(2) ss. 38(1) and (3)(b)(iii) did nt amount lo a convcrio11 of a judicial procc5s into an executh-e action.

The sections only made the court uide itself frorn the decision or an outside agency and the judicial process cornn1cnced thereafter.

(3) ss. 38( 1) and (3) :h)(iii) were not in breach of Art. 301 of the Constitution as they \\'ere in public interest and were protected by Art. 302.

Per Kapur and Shah, JJ.-Sr.ction 3H of the llanki1, g Cornpanies Act, 1949, \Vas an unreasonable restriction on the right of a hanking company to carry on its business and was, thcre£ore, unconstitutional.

The \'ice of the impugned pro, ision Jay in (a) the power \'este<l in the Rscrvc Rank to apply to the 1-Iigh Court for an order \Vin<ling up a bank cxerci!able solely on its subjccti\'e satisfaction as to the existence of conditions prescribed by the scctiJn, and (b) the ohfigation irnpoed by la\v upo11 the High Court to n1ak~ the

ordrr of winding up \vithout at any ti111r. enquiring \\'hcthcr the conditions on which the application \\as founded did in truth exist.

A proYision of la\\" providing for the in1position of restriction!\ on a citizen's fnndamcntal right pursu; int to rhc subjccti\'c satisfaction of the Reserv~ Rank even though it is an expr.rc ho<ly, as to the existence of a statt: of affairs. and thereby permanently depriving the citizen of his

right Or property, i~ "holly unreasonahlc.

A. K. Go7J/Jlan v. Sia.le, (1950) S.C.R. ll8, Stale of fadras y. V.G. Rao, (1952) S.C.R. 597, The Commi•sioner of Hind'!

3 S.C.R.

SUPREME COURT REPORTS 635

Religious Endowment•, Madras v.

Sri Lakshmindra Tirtha Swamiar of Sri Shirur Muth, (1954) S.C.R. 1005, Mahant Sri Jagannath Ramanuj Das v. State of Orissa, (1954) S.C.R. 1046

and Virendra v. State of Punjab, (1958) S.C.R. 308, considered.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 487 of 1961.

Appeal by special leave from the judgment and order dated December 5, 1960. of the Kerala High Court in Baking Companies Petition No. 11 of 1960.

WITH Petition No. 167 of 1961 Petition under Art. 32 of the Constitution of India for the enforcement of Fundamental Rights.

M.K. Namhiyar, J.B. Dadachanji, 0.0. Mathur and Ravinder Narain, for the appellant and the petitioner.

M.O. Set.alvad, Attorney-General of lndia, H.N.

Sanyal, Additional 8olicitor-General of India, R.

Ganapathy Iyer and R. H, Dhebar, for respondents No. 1 in C.A. No. 487of1961.

G. S. Pathak and K. R. Ohoudhuri, for respondents Nos. 4-6 in C. A. No. 487 of 1961.

M. 0. Setalvad, Attorney-General for India, H.N.

Sanyal, Additional Solicitor-General of India, R. Ganapathy Iyer, R. If. Dhebar and T. M. Sen for respondents Nos. 2 and 3 in Petition No. 167 ofl961. 19G2, March 7. The Judgmer, t of B. P. Sinha, C.J., M. Hidayatulh1h and J.R. Mudholkar, JJ., was delivered. by Hidayatullah, J. The Judgment of J.L.

Kapur and J. C. Shah, JJ., was delivered by Kapur, J.

Joseph Kuruvilla

Vellukunnel

v The Rererve Bank

of India

HIDAYATULLAH, J.-On August 8, 1960, the Hidayatullah J, Reserve Bank of India made an application in the High Court of Kerala under s. 38 of the Banking Companies Act, 1949 (IO of 19'19) read with the Companies Act, 1956 (1 of 1956), for the windirig up of the Palai Central Bank, Ltd. (having jts

lft6!

.louph Kurur.illa

V rl/1, Kutm.tl

' Tht Rtstttt Bank

of lruiia

Hidayatullah J.

636 SUPREME OOURT REPORTS [1962] SUPP.

registered office at Palai in the State of Kerala), for the appointment of the Official Liquidator of the High Court as the J.iquidator with all tho powers under the eaid Acts and for the appointment of the Official Liquidator as the Provisional Liquidator during the pendcnoy of the application.

This application \\as allowt, d on Decem her 5, 1960, and the present appeal with special Ieavo, has boen filed against the order.

The Palai Centml Bank, Ltd. (herein referred to as the Palai Ba.nk or tho Bank) was incorporated in January, I !l27 under the Trava11core Companies Hegulations. Till Hl36, it was known as "The Central Bank, Ltd.", when the name was changed.

Jn March l!l37, the Pala! .Bank was included in tho Second Schedule to the Res•:rvo Bank of India Act,

J!)3± (2 of 1934). According to the balance sheet of the Pahi Bank for the year ending December 31,

195LI, the paid-up capital was Rs. 24,8ll, ti39.5:3.

The nominal ca pi t:il tJf the Palai Bank was Rs. 40

lakhs divided i11to l,6P,000 equity shares of Hs.2G/. each. The Palai Bank seems to have greatly extended its business a~ time passed.

Jn 1921', tho deposits were a mere IIs .. 77,000/-, hut by I ~160, they had become almost Rs. JO crorcs. It had, during the yeare, 1.ieeornn the foremo•t Bank in Kenda State, and its place was I !ith in the whole of India. It had :!ii brancheR in :incl outsiclo the State of Kerala.

When Kerala became a Part B State, the RcservP Bank of India Act was extended to that area, and th<' Palai Bank came under the supervision of the Rcsnve Bank, which, in exercise of the powers vested in it by the Ranking Compani<.'s Act as wt>II as the R<.'serve Bank of India Act, prriodically inspected the Palai Bank. These ins- P"ctionH were ruade in J!li)J, July l!l53, February- )1arch ]!)56, Mar<"h 1958 and January-February, l 9(i0.

Every time, the Reserve Bank found itre.

3 S.C.R.

SUPREME COURT REPORTci. 637

gularities which were pointed out to the Bank, and special directions were iHsued. The main defects were that the advances made by the Palai Bank were not sound that the bulk of the advances were either irrecoverable or "sticky" (which means, not easily recoverable), that the income taken into account represented to a great extent unrealised interest on these advances, that large advances were made to the Directors, their relations and Companies, in which they were interested, on no security or inadequate security, and that the Bank was declaring dividends on the basis of profits which were computed without making provision for bad and doubtful debt and by using up the reserves at an alarming rate, while the deposits were going down.

In the beginning, the Reserve Bank contended itself, by prohibiting further advances to Directors, their relations and individuals, firms or companies, in which the Directors were interested, advising the Palai Bank to reduce clean advances and to regularise others, warning the Bank that the Reserve Bank considered that the business of the Bank was being conducted in the manner detrimental to the interests of its depositors, and that if the directions were not carried out, action under the first proviso to sub-s. (2) of s. 22 of the Banking Companies Act would be ta.ken by issuing a notice that a licence could not be granted to the Bank.

From theoorrespondence which has been filed in this case, it does appear that the l{eserve Bank was not satisfied at each following inspection that . the position had improved; rather it apprehended that it h'1d worsened, and that the directions had not been carried out. This was denied on behalf of the Bank, but nothing depends upon who is right and who is wrong, because no charge of nwla fide conduct is now made against the Reserve .Bank. As a result of the inspection in February- March, 1956, the Reserve Bank avers, it was found

196!

/oseph Kuruvilla

Vellukunnel

The Reserve Bank of India

Hidavatu/lah J

J962

J oseplr J{'u1ut1lla

VeJlukWU1rl

Tht! Resen-t Bank

of India

H kl ayatuU oh J.

fi38 SUPREME COURT REPORTs [1962] SUPi>.

that on December 31, 1955, the .advances stood at Ha, 355·02 lakha, of which llti. 171 ·"27 lakha were irrncoverable, and that the deposits of tho Bank had been impairer:! by Rs. l:)!JI3 lakhs. The Roservo Bank also avers that the Bank did not satisfy the requirements of the Banking Companies Act, particularly s. 11, about the minimum paidup capital and reserve6, and ss. 22(3) (a) and (b) about the ability of tho Bank to pay its depositors, present and future, in full or conducting its affair in a manner not detrimental to tho interesta of the d"positors, and did not satisfy the require ment<i of ss. 42(6)(a) (i) aud (ii) of the Reserve Bank of India Act. The Reserve Bank at this stage deputed an observer, and issued further directions and thrPatend to remove the name of the Palai

Bank from the Second Schedule to the Reaerve

Bank of India Act, if the directions were not faithfully and punctually carried out.

All this time, thti Reserve Bank was requiring the Palai Bank to submit statements and returns. In the inspection which was made in !1-farch-May, 1958, the position as on February 28, l 95S, was found to be even worse.

Though the d1posits had gone up, the advances had raisen to &. 421.56 lakhs, of which Rs. 208·05 lakhs were said to be irrecoverable, and in the opinion of tho lWl!erve Bank, after writing off tho paid-up capital, reserves etc. of the value of ls. 41l7 lakhs, deposits to the extent of &. 177·24 lakhs were impaired. More direotiona in the aamo key followed, and the .Bank was warned that it was conducting its affairs in a way which was detrimental to the interests of the depositors.

In the scmtiny in January-February, 1960, the position as on December 31, 1959, was said to be that out of the advances of Rs. 529 lakha, Rs. 218·51 lakhs were irrecoverable, Rs. 17·71 lakha

were doubtful, and Rs. ll l 57 lakbs were frozen or sticky.

3 S.C.R. SUPREME COURt REPORTS 639

On July 2,1, 1960, the Reserve Bank issued a 1962 letter containing the warnings to which the Palai Bank appeared to have become indurated, and

further ga.ve the Bank 12 month's time to improve matters and 30 days to reply to the inspection report. An Officer of the t:ltate Bank of India (Mr. Sivaraman) had already been deputed as the HidaJatul!

General Manager of the Palai Bank, and had taken _charge on July 1, 1960. On June 23, 1960, the balance sheet of the Bank was published showing the position as on December 31, 1959. The balance sheet showed a loss of Rs. 14-1/2 lakhs.

The Reserve Bank alleges that even in previous years there were losses, but were hidden. In June 1960, there was a run on several branches of the Palai Bank. Whether this was due to the publication of the balanoe sheet showing a loss, or whether it was due to the appointment of Mr. Sivaraman, it is hardly possible now to say. Betweon June 24,

1960 (deposits, Rs. 9'82 crores) and July 22, 1960 (deposits, Rs. 9·32 crores) there was a withdrawal of Rs. 50 lakhs. By August 3, 1960 (deposits, 8'50 crores) there was a withdrawal of Rs. 82 lakhs in 12 days.

To meet this run, the Bank had to borrow against Government securities with the result that all its Government securities except those worth Rs. 25 lakhs were pledged. The deposits, (Rs. 8·50 crores) consisted of Rs. 4 crores in fixed deposits, Rs. 2•25 crores in current accounts and Rs. 2·25 crores in savings deposits.

Against these, the l{eserve Bank found that the Palai Bank had cash to the extent of Rs. 50 lakhs and a capacity to borrow Rs. 1 crore against its securities.

The appeHant, however, urged before us that in the report of the General Manager dated November

8, 1960, the cash in hand was shown to be Rs. 42·18 lakhs and at Banks, Rs. 83·68 lakhs, the marketable securities, Rs. 22·98 lakhs and the estimated surplus from assets speoifically pledged, Rs. 142•63 lakhs.

These figures do not, of course, show that all this

Joseph Kuru1.Ji/(a

Vcl/uJ; unn11l

640 SUPREME COURT REPORTS [1962] SuPP.

money would have been available immediately to stem the run. It is thus evident that if the run continu<:d longer them was a likelihood that these

d"positors who were able to withdraw their money would obtain payment in foll, leaving the others with nothing or next to nothing. The Bank alleges in its a!Rdavits in reply that the run was Rubsiding, while the Reserve B'tnk maintains that it was going on unabated.

Whether it was abating or continuing, the reputation and security of tho Bank had been considerably shaken. The learned Company Judge, in his judgment under appeal, estimated

that Rs. lii8 lakhs (about one-sixth of the deposits) represented the sudden wit.hdrawals. The Directors of the Palai Bank sent Mr. Sivamman on August 3, 1960, to Bombay for urgent consultations, and Mr. Si varaman on his return, announced on the 8th that an application for the winding up of the Bank had Leen marle that day. and a provisional Liquidator had been appointed.

He accordingly, issued orders to the Branches to stop business and close the doors.

The Hesnrve Bank was of the opinion that the Palai Bank was not in a position to pay its dopoi; itors in full, and that the continuance of the Bank was prejudicial to the interests of the deposit-Ors.

The application, as already stated, was made on August 8, I !J60. It was heard by laman Kayar, J. He dispensed "ith notice under s. 450\2) of the

Coznpanie11 Act before passing the order appointing tho provisi011al Liquidator. He, however, _issued notice of the main application, and heard the

H.eerve Bank, the Palai Bank, the creditors supporting the petition and the creditors opposing it, and read several affidavits filed by the parties. On December 5, 1960, he accepted tho application of the Reserve Bank, and ordered that the Palai

Bank be wc.und 11p.

He was moved for a certificate i unucr Art. 13c( I) of the Constitution by the present '1 appellant (Mr. Joseph Kuruvilla Vellukunnei), a ; jl

4 '

3 S.C.R.

- ,'. 1 •,. ' _,

SUPREME COURT REPORTS 64i

former Director of the Palai Bank and also a contributory, but he declined to certify the case. The appellant then obtained special leave of this Court, and filed this appeal. Some others applied to intervene in the appeal. and were allowed to be heard.

One Mr. D. Chacko Kappon (a contributory and also a depositor) filed a petition under Art. 32 of the Constitution. That petition was heard along with this appeal. This judgment will dispose of the appeal as well as the writ petition.

In the High Court, the application of the Reserve Bank was opposed on two grounds. The first was that the action of the Reserve Bank in making the appl.ication for the winding up of the Palai Bank was mala fide.

This ground appears to have been given up in the High Court itself, and has not been raised before us.

The second ground was thats. 38(3)(b)(iii) of the Banking Companies Act, 1949, was void, inasmuch as it offends against Arts. 14 and 19 of the Constitution.· In the hearing before us; Art. 301 was also invoked. The deoision of the High Court was against the Bank and other answering respondents, and this ground alone has been urged before us.

Though the facts cease to play an important part in the decision of the question of law which survives, those narrated above were referred to by the learned Attorney-General as showing the background of the action taken by the Reserve Bank.

The appellant, in his reply, referred to some other facts in explanation to avoid a p0ssible prejudice to his case, if the facts as presented by the Reserve Bank only wer<' considered. While we are not required to express any opinion upon the correctness or otherwise of the allegations and counterallegations, we think it necessary to set out in brief some of the facts, to which our attention was drawn by the appellant, to show that we have borne in

1!6! .•

'7.k~"" ~..:~-~' Joseph Pruv1ll•

VellukuMel

' ."!1;• .,.,, ;._ The Retef'vt Btink.

of lnditi,

Hidayatu//ah J,

J•uj}a Kuruuilla

Y1llui-1

•• 1111 RtstrN B11nl.:

of India

HiU.)<lu/loh , .

642 SUPREME COURT REPORTs [1962] SUPP.

mind the rival contentions in determining the validity of tho section.

The appellant contended that enquiries by the 1 • efierve Bank in the past wcr.o not thorough; but in the application for winding up, the Reserve Bank had given specific details of the advances and their realisability. In this connectiou, we were referred to a reply made by the Reserve Bauk in answer to four schemes of compromise betwetn the Bank and its creditors suggest€d by the Palai .Bank. In that reply, the Reserve Bank said that no definite opinion could be expressed on the schemes except "after a detailed examination of the Bank's books of account with a view to assessing tho realisability of its assets and the probable pace. of recovery of the realisable assets." This, in our opinion, was a proper attitude to take, because by then, the condition of the Bank had mat{'rially altered, and all the past data had become out of date. Tho reply did not show that the Reserve Bank's inspection was not thorough. N'ext., it was argued that the Reserve Bank's estimate of cash and realisable assets W!lS wrong, if one. reads tho report of the Provisional Liquidator and the General Manager, dated November 8, 1960. We have already referred in an earlier part of this judgment to the amounts which, in their opinion, constitute<l the available assets, and have also shown why the Reserve Bank cannot be said to have made mistake. It was then contended that the run was under control, and our attention was drawn to certain statements in which the withdrawals during the months of July and August are shown in a tabular form. The run on the Bank did not follow a uniform course.

Sometimes, it was more, an<l sometimes it was less, but continue, it <lid; and that is the main point of the matter. It was >Jaid that tho Reserve Bank itself thought well of the Palai Bank, because in tho year 19!i4, it allowed the opening of a new Branch at Madurai, and evcn in itH last letter of July 21, 1960,

-"'

3 s.c.R.

SUPREME COuRT REPORTS 643

it gave the Palai Bank one yea.r to improve matters, and 30 days to show cause against the inspection reports, but took a hasty action before even the 30 days had expired. The action of the Reserve Bank was undoubtedly taken during the period of grace; but after July 21, the situation had altered so radically that delay might have defeated the very purpose of the law, under which action was taken. ·

Finally, it was contended that the Palai Bank began by being a rural Bank, which was making advances on the security of land, and such security, though "sticky" was capable of being realised.

Reference was made to the Report of the Travancore Cochin Banking Enquiry Commission, which was appointed in 1956, where, in making a survey of banking in Travancore-Cochin State, it was pointed out that the Banks were

"spread out into the rural interior of the State", and the main business of these banks was "to finance the rural people engaged in a small business-crop raising, produce processing, transporting, vending, etc." It was argued that to a rural Bank of this kind the standards of a commercial bank could not be applied and that the Reserve Bank should have made allowances in respect of the realisability of the advances, the worse of which belonged to a period prior to the extension of the Reserve Bank of India Act to this area. These advances given time, could have been cleared, and an attempt was, in fact, being earnestly made with the assistance of Mr. J. A.

Frost, a retired senior grade Officer of the Imperial Bank of India, who was appointed an adviser. It was pointed out that 3 accounts were closed, 26 were sued upon, and in 13, substantial remittances were received. All this. may be true; but it is useless for us to speculate as to_ what would have happened if the depositors did not take a ' hand in the affairs by making a run; and the a?tion of the Reserve Bank was precipitated

1962 .

J osejh KwuvUlo ~..,, _.,.

V ellutunnel . ··

' The Reserve Bank

oj India

Hitiayatu/lall J.

1961.

...

Thi -R•Jer11 Bak

Of lndiJ' I

64! SUPREME COUHT REPORTS [1962] SUPP.

hy the exigencies of the situation, which had arisen.

Those who wade a run for their money, were not going to wait till the Bank acquired sufficient funds to pay them afLer recovcrin~ its advance.

Those advances, as conceded, could not so easily be realised as tho advance made by a commercial bank on security other than that of land. If this rural bank began to arrange its business like a commercial bank it must necessarily be judged by the same standard,

and the affairs of the Palai Bank, in our opinion, had long left behind the rural character, and had emerged into those of a modern commercial bank.

What we have said above is sufficient to show that then.> was not e110ugh material on which the action of the Heservc Bank could strictly be charactcri8tld as mc1lu fide.

Indeed, the forbearance with which the Reservo Bank acted (and it proved unwise) has completely demonstrated the futility of granting time, and we are not surprised that the answering respondents in the High Court and tho appellant in this Court have not chosen to raise any iBBue about the honesty of the action.

We are thus concerned with the contention that ss. 38(1) and (:i)(b)(iii) arc void, being a breach of Arts. 14 and 19 of the Constitution, and uUra vires being in conflict with Art. 30 I. Tho arguments anent

Arts. 14 and 19 are based on tho same reasoning, but that under Art. 19 takes a few more facts into account.

Shortly stated, the argument is that ss.38

(l) and (3)(b)(iii) make the Reserve Bank the sole judge to decide whether the affairs or a banking. company are being so conducted as to be prejudicial to the interests of the depositors, and the Court has no option but to pass an order winding up the . banking company, when the application is ma.de Section 38 lays down : .

"38(1 ), Xot.withsta.nding anything contained in sectfon 391, section '192, section 433 1md section

3 S.C.R.

SUPREME COUR'r REPOl\TS 645

583 of the Companies Act, 1956, but without prejudice to its powers under sub-section(l) of section 37 of this Act, the High Court shall order the 'Yinding up of a banking company--

( a) if the banking company is unable to pay its debts ; or

(b) if an application for its winding up has been made by the Reserve Bank under section 37 or this section.

(2) The Reserve Bank shall make an application under tbis section for the winding up of a banking company if it is directed so to do by an order under clause (b) of sub-section ·

( 4) of section 35.

(3) The Reserve Bank may make an application under this section for the winding up pf a banking company- * * *

(b) if in the opinion of the Reserve Bank- * * (iii) the continuance of the banking company is prejudicial to the interests of its depositors.

It is said that the word "shall" in the first sub-section is mandatory, and compels the High Court to pass an order winding up a banking company when ever the Reserve Bank chooses to make an application. It is further pointed out that these powers exclude the operation of s. 433 of the Companies Act, under which companies are wound up.

The power conferred ou the Reserve Bank by the section is said to be bad under .".rt. 14, because it enables a discrimination between a banking company and any other company by prescribing different laws for their respective winding up, and is . . ; .

'c""1/16B

Juaep~ Irunwilla

 VetlUkunn.1

v~ The Ri'Urff Bani:

of_ltitfia

196t

' ./stph Kruuvilla

Vt//ukunnel

•• 'Tiu ReJtrDt Bank

Of lndia

Hkl•Jalul/:th ./,

646 SUPREME COURT REPORTS [ 1962] SUPP.

bad under Arts. 19(1 )(f} and (g} aa amounting to an unreasonable restriction on the holding of-property

and the right to carry on business ns a banking company. To amplify the first, it is_argued thats. 4:a

of the CompaniPs Act, when an application is made to wind up a company, the High Court has to be satisfied after n fair trial that an order to wind up the company is called for, and tho , Tuduc, who is indcpcnde:•t of executive control, is completely free to rPach a decision after the Company has shown cause, and there is a right of appeal against the•· derision, if adverse to tho company.

But under the procedure laid down in s. :is of the Banking Companies Act, the banking company proceeded against has no opportunity to show cause either before or after the winding up order, the Reserve Bank records no reaons in writing or communicates them, there is no access to Court aud no hearing b"fore the Court to dct<-nnino whether the proposed action is justified, and 110 rrdress if a mistake wero made.

Under the exercise oi that power, it is said, any hanking company can be supprc"sed by thn Hcscrve lfank or by the Central Government and the Courts are powerless, since the opinion of the Hcserve Bank and/or the central Government is not justiciable and there is no appeal against tho decision of thn Rcsen•e Bank or of the Court acting on the application oft he Reserve Bank.

It. is said that the umeasonablenel!s of the law arises further from the fact that t.he Reser\'o Bank

is not an independent or impartial judg<>, the members of the .Central and Local Boards whereof, being all nominees of Govnnment with no security of tenure, such as is enjoyed by the High Court Judges.

The Res••rve Bank is subject to directions from tho Central Government, and even if the Reserve Bank be of a contrary opinion, it has to filo an application (or the winding up of a banking company, if directed to do so bv the Central Government. It is further argued that. this drastic power under a law which is

3 S.C.R.

SUPREME COURT REPORTS 647

characterised as 'Draoonic' is 'uncanalised', 'uncon- J96f trolled' and 'despotic', and in its exercise, every prin- J .. eph Kumill• ciple of natural justice is set at nought, and the very V1ttukrumt1 fundamental conception of it, namely, resort to Court The Re.;:;., 8 .. 11: is completely absent. Such a law, it is said, is so ' of lntlia patently, unreasonable as to be a gross violation of Hidayatu/lah J. all fundamental rights. Lastly, it is contended that in giving the Reserve Bank the power to elect to pro

ceed under the Companies Act or under the Banking Companies Act, there is fort.her room for discrimina- . ., tion. It is thus contended thats. 38(1) of the Banking Companies Act cannot be upheld as a valid law on any principle.

The learned Attorney-General appearing for the answering respondents contends that the action of the Reserve Bank was fully supported and justified by the facts. According to him, the Palai Bank was inspected frequently for ten . years and the reports of the inspecting officers were made available to the Palai Bank not only for information but also for explanation and compliance. The action, says he, drastic though it may seem, was taken after numerous opportunities to the Palai -'Bank to mend matters, that even as late as 1960 the Reserve Bank gave a year's time for improvement, but immediate action had to be taken in view of the loss of confidence a.mong the depositors, a large number of whom made a run for their money. The learned Attorney-General thus says that there were many person who were of the opinion that the Reserve Bank should have acted earlier and that perhaps the Reserve Bank could be blamed for delaying the action but not for taking a precipitat(; action. He urgues that the Reserve Bank and not the Court was in a position to take prompt action bc- 9ause the Reserve Bank already possessed all the necessary information. He contends that the position of the Reserve Bank and its statue as a responsible body make it the proper authority to make such an important decision requiring immediate action an<l

( . - . '.

196t

J ostf'li K unniJJo

Vtltukunntl ,-:-:... .' 1'.

Tlk IUU'CI Bonk

.•f India ,,-.,---

648 SUPREME COURT REPORTS [1962] SUPP

that unloss tho Re>crv~ Ba.nk could be charged with dbhonest.v (which is n')t the case) the aotion of tho

Reserve Bank not only eannot he questionod, hut should not bo open to doulit. Accordincr to him, banking companies are in a class by thm selve8, and special law dealing with their winding up cannot be descrihod as discriminatory.

He contends !.hat the law is noithor discriminatory nor unreasonable, and that a prior judicial determination of :in issue of this kind is not a condition precedent to the making of a winding up order against a

hank.

He therefore, says that the appeal and the petition should be dismiSBed.

Before we consider the arguments of the two sides in detail, we wish to say a fow words about the poition of tho lkserve Bank in the financial affairs of India and also about its place in the scheme of tho law.

The Reserve Bank of India was establibhed on April I, 1935, by the Reserve Bank of India Act, UJ34.

Even before the establishment of the Reserve Bank, suggestions were made that there should be a cent.ral bank in India, and the Royal Commission on Indian Currency and Fi1iance had recommended in 1926 that the eurrcncy and credit of he country could only be put on a firm foundation, if a contra! bank was ostablished. The first Bill introduerd in Hl27 by Sir Basil Blaekett was dropped.

The Indian Central Banking Inquiiy Committee, however, reported in rn:n that thcro was a need for a contra.I banking institution in India "for s<.>curing the de1•elopment of tho Indian banking and credit system on a sound and proper basis." The Committeo pointed out that Homo of the Provincial Committoes had also RUl!gested the eRtahlishmcnt of the Rernrve Hank.

The Committ<'e ended by saying :

"Wri accordingly consider it to be a p1<1tt,, r of supreme importance from the point

3 S.C.R.

SUPREME COURT B.EPORTS _649

of view of the development of banking facilities in India, and of her economic advancement generally, that a Central or Heserve Bank should be created at the earliest possi, ble date. The establishment of such a bai1k would by mobilization of the banking and currency reserves of India in one hand tend to increase the volume of eredit available for trade, industry and agriculture and to mitigate the evils of fluctuating and high charges for the use of such credit caused by seasonal stringency." (Vol. I, Part I. Chap. XXII,

para, 605) The White Paper on Indian Constitutional Reforms also recommended the establishment of a Reserve Bank 'free from political influence'. As a result of these findings, when a fresh Bill was introduced by Sit' George Schuster on September 8, 1933, it was ac:i::pted and received the assent of the Governor-

Gewral on March 6, 1934.

The functions of the Reserve Ba.nk were generally indicated in the preamble as the regulation of the issue of the Bank notes and the keeping the re3erl'es with a view to securing monetary stability in India and generally to operate 'the currency and credit systf'm of the country to its nd vantage. But to enable the Reserve Bank to function in this manner, it had to be given other powers, so that it may function effectively as .a C3utrnl bank. To this end, the Reserve Bank was given the right to hold the cash balances of important comm<rcial banks, a right to transgct Government business in India which was nlso its obligation, and to enter into agreements with State Governments to transact their business.

In addition to these, th.e Reserve Bank could require all Banks included in the Second Schedule to the Act to maintain with the Resorvo Bank a balance not less then 5 per cent, of their demand liabiliies and 2 per cent. of their time liabilities.

Te

/962

J o~P'f. ~uuilla

'"Villul<tm"'I

,' v.

The R,,,,.. Ballk

•\iflril!N

'HidtlllatwUah J.

Jouplt Kr11nd//a

Vtll11kunrul

. "· 1"' Ru"ot Bank of lndia

BU/oyatulld J.

650 SUPREME COURT REPORTS (1962] SUPP.

Reserve Bank also performed tlrn normal functions of a central bank as well as an ordinary bank, though the latter functions arc not as <letai led as those of un ordinary bank.

But the most imp.)rtant funct.ion of the Re3erve Bank is to regulate the banking systr-m generally.

The Reserve Bank has been described as a Bankern' Bank. Under the RcsPrve Bank of India Act, tho scheduled banks m1iintain certain balances and the Reserve Bank can lend assistance to those banks

"a1 a lender of the last resort".

The l:cserve Bank has also beon given certain advisory and n•gulatory

fnnctiollB.

But its position as a central b:1nk, it acts as an agency for collecting financial information and statiAtics. It advises Government and ot.her banks on financial and banking matters, and for this purpose, it keeps itself informed of the activities and monetary position of scheduled and other hanks and inspects the hcolrn and accounts of scheduled bank and advises Government after

inspection whether a particular bank should he in eluded in the Second Schedule <•I' 11ot.

Every 'cbeduled bank is required to send to t.hc Resen;, Bank and to the Central Government a weekly return of its position in :i. form, which is prcseribcd.

Sometime, however, the Ht•sorve Bank allows 11 particular bank to send its returns once a month instc11d of every week. From thesi. returns, the Reserve Bank prepares and publishes consolidated statements showing thn monetary pooition in the country. The inclusion of a bank in the Second Schedule is the function of the Reserve Bank, ancl under ss. 12(!i)(a)

(iii) and (b)(ii) it satisfies itfelf int;; r alill that tht> affairs of thH particular bank am not being conducted in a manner detrimental to the int., rests of its depositors. The Reserve Bank has further the power to prohibit any scheduled bank from rec:civing, after

~ week, any fresh deposits.

3 S.C.R.

SUPREME COURT REPORTS 651

The above analysis of some of the provisions of the Reserve Bank of India Act show that the Reserve Bank of India has been created as a cen tral bank with powers of supervision, ad vice and inspection, over banks, particularly those desiring that they be included in the Second Schedule or those scheduled already. The Reserve Bank thus safoguards the economy aud the financial stability of the country. No doubt, the Board is composed of nominated members ; but from the nature of things, it could not be otherwise. Neither election nor competitive examinations can effectively take the place of nominations, if the Board is to be com posed of men of proved worth and standing, and there is no other method which can even be contemplated. No doubt, the members of the Board are subject to removal, but neither integrity nor efficie ncy is secured only by such guarantee, and we have no reason to think that the Reserve Bank acted in this case, or acts in other cases under pressnre or from oblique motives.

As was pointed out in another connection by this Court in All lnflia Bmik Employee.<' Association v. National Industrial Tribu nal (').

"If it was not the Reserve Bank of India, the only other authorit.} that could be entrusted with the function would be the Finance Ministry of the Government of India and that department would necessarily be guided by the Reserve Bank having regard to the intimate knowledge which .the Reserve Bank has of the banking structure of the count! y as a whole and of the affairs of each ba, nk in particular."

The position of the Reserve Bank being such as we have stated from the Reserve Bank of India Act, the next thing to enqnire is its powers under

(1) [1962] 3 S.C.R. 269, 299,

Joseph Kuruvilla

V ellukurinel ,

.v.

The R""" B•k of In4io

Hidaya/u/1"11 J.

196B

J os•Ph K111ul!ill• vtu u trvtn, / ' . v Tit, Beanr Bank ... ..; ..• ! lridi•

·~

652 SUPREME COURT REPORTS [1962] SUPP.

the Banking Companies Act.

The Banking Companies Act, in its present form, is the product of many legislative enactrnents. The Banks' Liquidation Proceedings Committee ( l\Jfl:!) correctly described it as "m:J.dc up of shred• and patche~." We wore taken through the entire evolutionary process by th~ le.i.rnd Att.irney.GinDr.i.I; but we d'J not consider it necessary to trace the various st<ips. We shall con tent oursel vos with a reference to the salient landmarks. fu the Indian Companies Act, 1913, there was no special procedure for banking comp:rnies, particularly rolating to their winding up. Special provisions wore introduced in that Act by tho Indian Companies (Amendment) Act, 1936.

Part X-A, which was then introduced, merely oi1aoted certain regulatory , provisions, but of winding up of banking companies, it said nothing. The amendment hardly met the purpose and the Reserve Bank of India framed a draft bill as far back as !039 .from which has been fashioned the present Banking Companies Act.

During the War years, tbe Indian Companies Act was amended several times to meet some special exigencies, with which we are not concerned.

But by , July, 1946, it was rc1ilised that i:ert.ain undesirable features in banking had come to exist.

Banks were then getting control of non-banking companies and by the interlocking of shares, t.he banking companies were able to manipulate the finances at their disposal.

The main foature8 were "the. grant of Joans to persons connected with the management of banks without adequate .security cxtenive window-dressing at t.he time of preparing balanccshects, and, in gcnPral, a tendency to utilise the

bank'~ fnnrlR to the cletriment of the int<:>rests of the depositors." It must not he forgotten that the Indian Companies Act, 1913, was concerned primarily with safeguarding the interes!s of the stoC'khoMers, whereas in a hanking company, thr in- 1; erests of the depositors are invariably many times

3 s.c.R.

SUPREME COURT REPORTS

• '1 653

those of the stockholders, if those interests can be said tu be represented by the monies invested respectively. In 1946, an Ordinance was promulgated consisting of only six: sections, of which the operative sections were the last four.

Section 3 enabled the Central Government to direct the Reserve Bank to cause an inspection to be made of any banking company and its books and accounts and to make a report to the Central Government; Section 4 provided the machinery and the procedure to implements. 3. i:iection 5 empowered Government to prohibit a bank from receiving fresh deposits or to direct the Reserve Bank not to include a particular bank in the Second Schedule, or to exclude it_, if already included. Sub-section

(2) provided for certain penalties, and s. 6 authorised the Central Government to publish, after reasonable notice to the banking company' concerned, any report or parts thereof. This was an attempt to ensure the depositors a certain measure of safety in regard to their money.

This Ordinance was followed by the .Banking Companies (Restriction of Branches) Act, 1946, which, as its name shows, put, a curb on the indiscriminate opening of branches by some banks.

The 'evil of indiscriminate advances and loans was then sought to be met by an Ordinance promulgated in 1948 intituled "The Banking Companies

Control Ordinance" (XXV of 194~).

In that Ordinance, it was provided that the Court shall appoint the Reserve Bank as the Official Liquidator of a banking company on the application of the Reserve Bank in that behalf. The Reserv"l Bank of India Act was also amended to enable the 'Reserve Bank to give a loan or loans to a banking company with a first charge on the assets, if wound up.

A large number of banking companies had failed during the years, 1947, 1.948 and 1949.' Between 1926 and 1937, 23 Banks had suspended payment. In 1938 and 1939, 46 Banks':

Joseph KurU; iua

Velluknmri.;- ·

\'. ·, The Beservi _Bank

of indi4' ·

Hid•.Ytu/lah J,

Jost!J~ KutWil/a

V1t1ukunntl

•• Thi R tstr~ BW

•! l•dio

Bid•Jolulleh J.

SUPREME COURT REPORTS (1962) SUPP.

failed, from 1940 to 1946, 93 B1mks were involved.

But, in 194 7, lll48 and l!l49 there were as many as 123 failures involving outside liabilities of Rs. 82 crorcB !

The largest number was in Calcutta. with 83 Ranks.

In the winding up proceeding that followed, many unsat.isfactory features were notioed. It was noticed that the realisations were insignificant, while the costs were great, and enormous expenditure of time took place.

The winding up of any company, be it a banking company or any other, requir&s an investigation of the affairs, the recovery and realisation of assets and distribution of what is realised. While these mattors can, of course, bt> carried on without undue hurry, the decision whether there should be a winding up or not, cannot be unduly deferred in the case of a banking company, if the interests of tho depositors are to be safeguarded. To achieve solidarity in banking operations and also to preserve the rights of the depositors while a bank continues and more so when it cannot, the Banking Companies Act was the logical, and indeed, the only answers.

We have seen that the Heserve Bank was already functioning as a central bank with a certain meure of control over the other banks, aoheduled or unscheduled.

This control was tightened in the Hanking Companies Act by making provisions which were intended to protect the interests of the depositors.

Differences notices hie between the Banking Companies Act, on the one hand and tho Companies Act, on the other, which have been characterised as discriminatory, are thus explainable on the basis of the object to be achieved. We aha.II soon illustrate this by a reference to the sections them6elves.

For the present we only wish to emphasise that banking companiea cannot be compared with other companies.

The ordinary companies deal with the money of the stockholders, who own a share in the assets,

3 s.c.k. suP:REME cotJR± REPokrs 655

who appoint their own Directors, for better or for worse, and whose liability is also limited. The banking companies are in an entirely different class, as they deal with the money of the depositors, who have no security except the solvency of the banking company and its sound dealings with their money. Ex facie, the bankinir companies must he regulated somewhat differentls, and the .interests of the depositors must be paramount and the winding up of such companies depends upon other considerations, chief among which is the desire to pay off the creditors as far as possible in full or at least equitably. The action is thus dictated not from any abrstract consideration of a long-range view of the future ability of a bank to pay its creditors but its ability to pay them at any given time. In this connection, the Reserve Bank has been given by the Banking Companies Act the power and invesed with the duty of watching the affairs of every banking company with a view to ensuring the safety of the depositors' money. There is thus, at the very start, a reasonable classification, which is also a very just, and practical classification, to achieve the avowed purpose.

It is hardly necessary to examine each and every provision of the Banking Companies Act.

When the Banking Companies Act was originally enacted, the main objects were to prescrible minimum capital standards, to prohibits the non-banking companies to accept deposits repayable on demand and to limit dividends payable. But included in the Act was a comprehensive scheme fur licensing of banks and a conferral on the Reserve Bank of power to call for periodical returns and balance sheets and to inspect books and accounts of banking companies. The Act also empowered the Central Government to take action against banks conducting their affairs in a manner detrimental to the interests of the depositors, a.nd

Jos.ph K.,..;111

Vtllukurwl . ., v •.

The Reser1J1 Bani:

of Indi4

Hii1y1tull•h J,

1962 --··-

J •f'.,~!n""':f'"

• ,"1 v. ' The Rtserui JJ ...

of rrldto

Hid1JG1idlolz J.

fJ5tl SUPREME COURT REPORTS [1962] 8rP

provided for a quicker procedure for winding up banking companies.

When the Banking Companies Act was pase<l in 194\J, it was explained in the note on cl. 37, whieh corresponded to s. ;{8, that the proviions of the Indian Companies Act in respect of liquidation of companies did not seem to be suitable for banking companies, that a bank s business being of an over-the-counter kind, the bank has to meet immediately its liability and a proviion for winding up of the banking company when it refuses to meet a lawful demand within a stated time, WlJ-S

necesary. It was also stated that the Reserve Bank was given authority to apply for the liquidation of the hanking company, if its affairs were oonductcd tu the dotriment of the interests of the

depobitms.

An examination of the Banking Companies Act reveals two things prominently.

The first is that the wnole intend and purpose of that Act is to secure tho interests of the depositors.

The second is that the Reserve Bank is the instrumentality by which this intend is to be achieved.

The Act, at every turn, makes tho Reserve Bank the authority to sanction, permits, certify, in8pect, report, advise, control, direct, license and prohibit.

There is hardly any provision where the Reserve Bank's judgment is not made final visa-vis a banking company except raroly where an appeal to the Central Government can lie.

No useful purpose will be served in referring to these sections in detail.

Nor do the powers of the Reserve Rank end there. The Reserve Bank not only ha.s powers over banking companies while they am functioning, but it has al8o powers when tho banking companies wish or a.re forced to cease to funr.tion.

If a banking company wants to suspend its business a.nd applies to the High Court for a moratorium, the applioa.tion is not ma.intaina.ble, unleBB

3 S.C.R.

' . ' . ..

SUPREME COURT REPORTS 657

it is accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay its debts.

When the High Court grants the . relief without such report, it has to c<J.11 for a report from the Reserve Bank. The High Court is also required to have regard to the interests of the depositors, and even during the period of moratorium granted by the High Court, the Reserve Bank can apply for the winding up of the banking company. Sections 39 and 41-A give special powers to the Reserve Bank in winding up proceedings. Even in voluntary winding up of a banking company, the Reserve Bank has to certify. that the banking company is able to pay in full all its debts to its creditors,\ as they accrue. In amalgamation of banking companies, the scheme has to be approved by the Reserve Bank. Similarly, in compromises or arrangements between the banking company and its creditors, the Reserve Bank has to be satisfied.

In all these matters, the satisfaction inter alia, must be as to the interests of the depositors. In reconstruction of banking company after an application by the Reserve Bank for an order moratorium, the Reserve Bank has to satisfy itself and prepare a scheme, which, inter alia, must be in the interests of the depositors.

This brief survey of some of the other provisions of the Banking Companies Act, in addition to the general provisions earlier noticed, makes it plain that the legislature considers that consistent with its position as a central bank and more so with its duties and obligations, the Reserve Bank must have a decisive voice in certain matters. It is in this context and setting that the provisions of ss. 38(1} and (3}(b}(iii} of the Banking Companies Act must be viewed. It must not be overlooked that the legislature, in view of the sad experiences of the past, was anxious to devise a machinery for the supervision, inspeotion and effective functioning

Joseph Kat:u.illa

Velluk"!"'el

Oi The Reserve.Bartk

of lnda ·

Hidtryatullah J.

I9G!

Jos.ph Kiuuvil/a

Y1Udunntl •.

T/t, llmri., Batik

of India

Hi<f4Jolulla1' J.

U5S SUPRE!IIE COUltT REPORTS [l962j SUPP.

of banking companies in the country.

Associated with this was the peer; y closure of banking companies, which were harmful to the interests of the depositors. The legislature achieved both theso objectives through the Reserve Bank, which, because of its special powers and advantages, was in a position to act promptly and effectively.

To aid the Reserve Bank, the Courts were required by law to be guided in certain mi1tters by the opinion and judgment of the Reserve Bank, and in the matter of their disposal of winding up cases relating to banking companies, a special prooedure was enacted in Part IIIA of the Banking Companies Act.

We are now in a position to deal with the argument that ss. :~8(1) and (3)(b)(iii) or'the Banking Companies Act are void ·-firstly because they permit discrimination between banking companies on the one hand, and non-banking companies on the other, and also between banking companies inter se, and secondly because they create an unreasonable restriction upon the right to carry 011 banking, and lastly, because the who!<~ procedure is a denial of the principles of natural justice, chiefly by denying an access to Courts. Though the arguments in this appeal have for their immediate object the dec!iLration that ss. 38( 1) and (3)(b) (iii) of the Banking Companies Act are void, they have ranged over a very wide fiold. In support of the first limb of the argument, Art. 14 is invoked, and in support of tho second and third, Arts. 19(l)(f) and (g); and the argument proceeds along lines so well-known now as to need hardly any further amplification. There being no direct ruling either of this Court or of ny High Court, assistance is 80ught to be deri\'Cd from observations in previous decisions of this Court relating to other Jaws.

In reply, tho learned Attorney-General ha<1 rdied upon th" provisions of certain banking law~ in America and Japan and decisions of the

3 S.C.R.

SUPREME COURT REPORTS 659

American Courts, where such American laws were tested under the 'due process' clause. We shall refer to those laws and briefly rulings in the sequel.

As regards the first point, viz., discrimination between banking companies and non-bankin{l: companies, we have already sufficiently indicated the wide difference that exists between these two types and the need for special laws dealing with banking companies. We have also pointed out, the mischief that was sought to be remedied and how the present law has be(ln evolved after considerable deliberation.

A special Cornmittee called the Banks' Liquidation Proceeding Committee was appointed in J 952, and the findings and recommen dations of the Committee were implemented, amending the Banking Companies Act and incor

porating changes, of which the impugned section in its present form is one.

There being a very clear-cut and valid classification, the different procedure cannot be said to be discriminatory, because it is based on differences which are related to the end sought to be achieved.

Further, we do not think that the possibility that the procedure under ss. 38(1) and (3)(b)(iii) may be invoked in some cases and the procedure of the Companies Act in others, makes any difference, because the different procedures will be invoked to suit defferent situations, and it cannot be said that the Reserve Bank would act arbitrarily from case to case. . The Reserve Bank, apart from its being a reasonable body, is answerable to the Central . Government, and the public opinion is certainly strong and vocal enough for it to heed.

If the Reserve Bank were to act mala fide, the Central Government and in the .last resort, the Courts, will be there to intervene. In our judgment, the provisions of ss. 38(1) and (3 )(b)(iii) cannot be said to be a breach of Art. 14 of the

Constitution.

J.o'sef; IJ .Kuruvilla

 P 1//uJ; unn1/ ' . v.

TM 'Reserve Bonk

of Indio

Hidayatullah J,

Jo, q, h _ l(u, t1tilla

Vellukunnd

. • Yo TM&ww Ronk of /nJ; a

Hi, U pluiloh .I.

660 SuPRE:ME COURT REPORTs [1962] SUPP.

That leaves over the second and third arguments, which proceed upon the same materials. In this connection, tho main grounds of attack have already been set out in this judgment. Before we deal with the central point, we shall deal with certain others which proceed, so to speak, from the side lines.

The objection that the Reserve Bank gives no hearing, records no reasons in writing and does not communicate them is met at least in this case by the admitted facts.

The numerous inspection reports and directions issued by the Reserve Bank over a period of nearly nine yea.rs, together with the application filed in this case, prove amply that there was enough hearing of and enough communication of the grounds of action to, the

Pa.lai Bank. The Bank had also sufficient time and opportunity to establish its own point of view before the Reserve Bank. It \\'as impossible that the Reserve Bank, with the run on the Bank, woulcl sit down to decide after bearing whethE>r to take action or not, while withdrawals were being made at the rate of Iis. 7 lakhs per day. The emergency of the situations which may arise, is itself the justification for the procedure open under the Act and taken in this case.

In our opinion, these grounds cannot be entertained. It is difficult to imagine that the Reserve Bank would a.ct differently in another case.

The ma.in ground of attack is the way ss. 38( I ) and (3)(b)(iii) make it mand"tory for the High Court to pass <\D ordar winding up a banking company whenever the Reserve Bank under its powers or under an order of the Central Government makes an application for ihc winding up of a banking company. It is argued that suoh a power to the Reserve Bank is an uncontrolled and despotic power and to crown all, access to Courts is not poRSible because the Court itself must pass an order without deciding whether the affairs of the banking

3 S.C.R.

SUPREME COURT REPORTS 661

company are being conducted in a manner detrimental to the interests of the depositors-a fact capable of being proved like any other fact. It is argued as a matter of principle that any law which bars a decision by the Court is itself unreasonable without more. Mr. Pathak, in supplementing the above contentions of Mr. Nambiar, also contends that by the law in question a judicial process has been converted into an executive action, and subjective determination has taken the place of judicial determination.

He also contends that the Reserve Bank accuses a banking company, and then tries the issue to the complete exclusion of Courts.

It must not be overlooked that the winding up of a banking company takes place before the High Court and under the process of law. The judicial process is excluded only in respect of the momentous decision whether a winding up order should be made or not. This opinion is left to the .Reserve Bank, and the Court merely passes an order according to the Reserve Bank's opinion, and then proceeds to wind up the banking company according to law. The narrow question is whether in leaving this decision to the Reserve Bank the law offends the principles of natural justice, and becomes so unreasonable, viewed in the light of Art. l~, as to become void. This is the point on which the respective parties joined issue and had much to say, and this is the crucial point in this case.

In support of this contention, reliance on behalf of the appellant is placed upon certain cases of this Court, anci we shall begin by noticing them in brief. The first case relied upon is A. K. Gopa/, an

v. The State('). In that case, the validity of ss. 3, 7, !0-14 of the Preventive Detention Act, 1950, was challenged on a petition under Art. 32 of the Constitution for a writ of habeas corpns. Certain

observations of Kania, C.J., and Faz! Ali, J., were

(IJ [1950J s.c.R. aa.

' ..

1962 - Joseph Euruiiilla

Vi //rllr.u,...I ·

The Re1'r~ Bank of

/ndfa

H iday•lul/ph J.

196!

.latt/J~ Kurur; illo -:

i, aukwmel

v. 1e Rt'"°' Ba~ of~

1nii•

662 SUPREME COURT REPORTS [1962] SUPP.

relied upon to show that the right to be heard and tried is tho very basis of tho rule of law. :Paz! Ali, J., observed that there is a fundn, montal principle that a person whose rights are affected must be heard. '.rbc learned Judge referred to several cases in which the maxim, rw<li ri/IR.ram parlR.m, has beenlinvoked and applied particularly the observations of Lord .'.lfacnaghten in La.pointe v. L' Asso ciation etc., de Jfontrr'tl ( 1 }, who condemned a procedure which requirer! no bearing as being "contrary to rules of society and above all contray

to the elementary principles of justiP, e."

It cannot reasonably he said tha. t there would he no hearing in cases of this type. While we agreo that it is obnoxious to the rule of law as it exists among civilized nations, that a person should hr condemned, unheard, we cannot say that in this case the Palai Rank wn, s not heard, and this case is really typical of those casc8 in which such a powff would be invoked. The karncd Attorney- General was justified in saying that there was plenty of hearing before the appli<:tion wos filed.

The gist. of the objection must thus be taken to ho that the P~ lai Rank was not beard in the High Court before the making of the impugned order.

If a valid law could he made leaving to the determination of the Resr, rvc Bank whether a banking company should he wound up and the Court to implement t.hat decision, then this petition must fail ; hut if it cannot be made, then it must succeed.

We have thus to sec whether there is any inviolable rule that every determination must always he made by the Court and by no other authority.

In dealing with the rulings of this Court cited to us, of which wo have already mentioned one, we shall enquire whet.her such a widn proposition can he said to have been established

(1) [1906] A.C. 535,

3 3.C.R.

SUPREME l.JOURT REPORTS 663

before. In A. K. Gopalan's case(l), s.14 of the Preventive Detention Act was held void as contravening Art. 22(5) of the Constitution in so far as it prohibited a person who was detained from disclosing even to the Court the grounds of his detention and the representation made by him. It was said that the right to move an appropriate Court for a writ of habeas corpus and therein to show that the detention was improper, was undeniable and it was held that s. 14, which stood in the way of this right, was void .. No general proposition that the Court must decide whether the person should be detained or not was laid down in that case. The law which allowed a subjective determination of the executive was in fact, upheld, and there are passages in the judgments of the majority to show that a judicial trial in cases of preventive detention was not considered necessary.

In State of Madras v. V. G. Row (2), ss. 15(2)- (b} and 16 of the Indian Criminal Law Amendment Act, 1908' [as amended by the Indian Criminal Law Amendment (Madras) Act, 1950], were called in question, inter alia, on the ground that thE:y em powered the State to declare associations illegal by a notification without a provision for judicial enquiry. It was held by this Court that the conferral of authority on the executive Government to impose restrictions on the right of association without allowing the grounds of such imposition both in their factual and fogal a8pects to be duly tested in a judicial enquiry was a strong element to be taken into account in judging the reasonableness of the restriction. It was also added :

'f'fhe formula of subje'ctive satisfaction of the Government or of its officers, with an Advi8ory Board thrown into review the materials on which the Government seeks to override a basic freedom guaranteed to tht:

(I) [I950J s.c.R. as. c21 f1952J s.c.R .. \97.

IU61

J 01eph KrrruvilJo

Vel lukunnel

The Reserve .Btmk of .

Indio

H idayatul/a/i J,

J.JJtPh Ii uru'l'iJla

v,.uukrmntl

Tiu R, s•oe, Bank of

l114i4

66'1

SUPREME COURT REPORTS (1962] SUPP.

citizen, mn.y br; iiewed as reasonn.ble only m very exceptional, circumstances ...... ".

Earlier, in the amc judgment it was said :

" ... the tet of reasonableness, wherever prescribed, should be applied to each indivi dual statute impugned, 1ind no abstract standard, or general pattern, of reasonableness

can be laid down as applicable to all cases." V. G. Rows case (l) shows that laws allowing subjective determination by the executive are not to be struck down out of hand, but that their reasonableness must be judged according to the standards appropriat-0 to the circumstances. It may, howe\er, be meutioned that in V. G. Row r, ase (1) a distinction was mado between a law requiring J.nticipatory action particularly on grounds of suspicion, and a law which authority action based on the fai:tual exi8tence of curtain grounds. A. K.

Gopalan's rase 1') and Dr. N. B. Khare v. The Stat.c of Ddhi (') wt, re distinguished on this narrow ground which appears to havu bt, en conceded then by thu learned Attorney General. The factual existence of grounds-amenable to an objcetivo determination by the Court in the present case, namely prcj11dice to t.he interests of the depositors was said to place thi8 case within the rule in V. G. Row's crtse (I).

But cases of dntentinu and associations declared unlawful are not in the same class as a banking company on which then is a run by the depositors and whose affairs, on inspf•ction, aro found to be mismanaged and conducted in such a way that it is unable to pay all lawful demands upon it. Tim factlml background will not be one of suspicion, and action will be basld on concrete facts, which will normally be checked and rechecked before the final decision, and, in our opinion, it iR impossible to equate such a case with either A. K. r:opalan\ case(') or V. G. Row's mse(').

(I) [19521 SCR. 597.

(2) [1950) S.C.R.118. (3) i 19501 S.C.R. 5l'l.

3 S.C.R.

SUPREME COURT REPORTS 665

The next case to which reference was made is Tkakur RagkulJir Singh v. The Cm;, rt of wards,

.4jrnb ('). In that case, s. 112 of the Agra Tenancy and Land Records Act (42 of 1950) was declared void. That section .allowed the Court of Wards to take over the property of a landlord under the Ajmer Government Wards Reg11lation

(l of 1888) if the landlord habitually infringed the rights of tenants. Such a landlord was under

s. 112 deemed to be "disqualified to manage his property." The reason for striking down the section was that it completely negatived the fundamental right under Art. 19(l)(f)by making the enjoyment of the right to depend .on the mere discretion of the executive. The absence of any provision which would enable the landlord held to be a habitual infringer of the rights of his tenants, to have recourse to a Civil Court to test the correr.tness of the determination against him was held to oreate the invalidity. It is t-0 be noticed that the learned Attorney-General in that case Mnceded the point, but the refl.son behind the rule appears to be that the law there prescribed a punishment or penalt, y for the bad behaviour of the landlord, and no person should be punished without having an opportunity to show cause.

The question, therefore, is, can the ruling be made applicable ? It does not Jay down . any general princiJlle applicable to all cases beyond the one we have m; intioned. The action to wind up a banking company cannot be S!bid to be a punishment for mismanagement but action designed to presence the rights of the depositors, and the two situations are hardly similar.

The next two cases relied upon were The . Commissioner, Hiru/,1t Religiaus Endowments, Madras

v. Sri Lakshmindra Ttrtha Swamiar of Sri Shirur Mutt(') and Mahant Sri .Tagannath Ramanuj Das v.

TlUl Smte of OriBSa (').

Tn these case, it was (I) (1953] s.a.R. 1049.

(2) [1954] S.C.R. HlO~- ' {al [19MJ s.c.a. 1046. ,

J4se{lh. KuruviU.

Velluk; nml' ·

The Rtse'vt.SCl!k •J India- '

666 SUPREME COURT REPORTS [1962] SUPP.

JD6Z conceded by the counsel for the State that certain

.Toreph K•roillo . sections of the .Madras Religious and Charitable Vrl/ukun"l.

Endowments Act ( xrx of 195 l) and of the Orissa Tia, Rm;~,, B.,, k of, Hindu Religious En<lowm0nts Act, 1939 (as amen-

/•d.. <led in 1952), were ultm 1ires Art<1. l!l(l)(f), 25 and

Hi<laJalu//ah J, 26 of the Constitution.

This Court also found in · ' the former caso that the provisions were extremely drastio in their character and the worst feature was that there was no access to Courts. The Act in question was considered dra; itic because under it a religious institution could he notified and taken over and veted in an executive officer merely by stating that the Hoare] "was satisfied that in the interests of proper nd!llinistration of the Math and its endowments, the settlement of a scheme was necessary.'' In the latter r~'lse, it was observed as follows :

"Sections 38 and 39 relate to the framing of a scheme.

A scheme can certainly be settled to ensure due administration of the endowed property but the objection seems to be that the Act provides for the framing of a scheme not by a civil court or under its supervision but by a Commissioner who is a more administrative or executive officer.

There is also no provision for a.ppeal againsts his order to the court."

Aftor commenting upon the amendment of stths.

(4) of s. 39, which took away the right of suit and made the order of the Commissioner final and conclusive, this Court concluded :

"We think that t, bc settling of a scheme in regard to a religiolli! instiution by an executive officer without the mtorvent1011 of any judicial tribunal amounts to an unreasonable restriction upon the right of property of the superior of. the. reliious insitu

jon whioh is blendeq with his off1oe.

Seot1os

3S.c.R.

SUPREME COURT REPORTS 667

38 and 39 of the Act must, therefore, be held to be invalid." These words would seem to show that the 'intervention' of a 'judicial tribunal' is the sine qua non of reasonable determination of any issue. But these cases must be read with the case reported iu Sri Sadasib Prakash

Brahmachari v. The St, ate of Orissa (1).

After the judgment of this Court in the case froin Orissa, the Orissa Legislature passed Orissa Act XVII of 1954 purporting to amend not the Act of 1939 but Orissa Act II of 1952 which had been passed but not brought into force.

The Orissa Act XVIII of 19.54. on receiving the assent of the President came into force at once, and Act II of 1952 became amended and modified. The 1952 Act was then brought into force from January l, 1955, by a notification.

By the new Act, which provided for the same subject-matter as the Act of 1939, the right of snit still remained taken away, but a right of appeal direct to the High Court was provided. It was contended again that the Act continued to be bad for the reasons given in the earlier case of 1954. This Court then observed :

"It is further urged that the initial decision in a scheme-proceeding is still on the basis of an executive enquiry by an executive officer and that in any case a direct appeal to the High Court as against the . Commissioner's order cannot be as adequate a safeguard regarding the .rights of Mahants, as a suit and a right of' appeal therefrom in the ordinary course to the higher courts would be. It is undoubtedly true that from a litigant's point of view an appeal to the High Court from the Commissioner's order is not the saine as, an independent right of suit and an appeal to the higher courts from the reHult of that suit. But in order to jude

(l) [I956J s.c.R. 43.

Josep/1 Kuruvilla

Ve/Jukunnel

v. .

The Reserv1 Bank of

India

Hiday.i1ul1Qh J.

lSU _, __

Joseph Kururilla

Vtiluk111111el ...

Tk Rest'"' Bank of l Mia

SUPREME COURT REPORTS [1962] SUPP.

whether the provisions in the present Act oporate by way of unreasonable restriction for constitutional purposes wh; it is to he seen is whether the pnrson affected getH a reasonable chance of presenting his <'ntir" case bPfore the original tribunal which has to determine judicially the questions raised and whether he has a regular appeal to the ordinarily constituted t'Durt or courts to correct the errors, if any, of the tribunal of first instance. For that purpose it is relevant. to m'tice that in the present Act, the Commissioner of Endowments has, hy virtue of section 4 thereof. to be a member of the Judicial Service (of the State) not being below the rank of a ubordinate , Judge, while undor section 7 of Act IV of 1939, Commissioner of Endowment.s could be a person of either the judicial or the executive servico and that <'ven whBre a member of the judicial service is appointee! he may be 1i person below the ra11k of a Subordinate Judge. Another important difference has also to be noticeu, viz., that while under section 38 of the previous Act the enquiry has to be co11ducted •in such manner as may bo prescribed' which means as preseribl'd by the Provinl'ial Government bv rules made under the Act and hence changea.ble by the Go\crnment., under the pres<mt Act, section :2( 1 )lb) specifically enjoins that the 'Commissioner ohall hold an enquiry in the manner prescribed andso far as may be in accordauce with the provisions

of the Code of Civil Prnccclure rebting to the trial of suits",

This Court, therefore, held that the scheme framed was not unrensonab le.

At p. fi!l of the l{eport, a summary of the four steps which mado for rea 0 011l'blcness was given as follows :-

"( 1) The scheme is to be framed b;'

ii s.C.R. sbi>ii:EM:E COURT REPORTS 669

a Commissioner, .who is, by appointment a judicial officer.

(2) The procedure is, as far as may be, the same as that in the trial of suits.

( il) There is a preliminary enquiry by the Assistant Commissioner.

(4) There is an appeal to the High Court." ·

. This was a departurefrom the insistence on the intervention of a judicial tribunal. It was considered enough if the person was a judicial officer and the procedure was that of the trial of suits, as laid down in the Civil Procedure Code. The Court still went further when it dealt with the earlier schemes which might have been framed by (a) an executive officer and (b) in pursuance of procedure prescribed by the Executive Government. The Court said that "this was merely a theoretical possibility".

The absence of a preliminary enquiry in No. (3) was not considered a serious point. The order of the executive officer in No. (1) was held.not of importance, as the.Commissioner was a Subordinate Judge of the Orissa Judicial Service. The question of procedure (No: 2) was also not considered important, because the procedure prescribed by rules resembled that of trial of suits. As regards the right of appeal, s. 79A gave a right in all decided cases, and that was considered enough; but whether it was invoked or not in all cases does not appear to have been ascertained. It would appear from the'se three decisions that the gist of reasonableness was held to be not so much in the label of the officer as in a judicial approach to the question to be decided according to a

procedure which gave an adequate hearing.

That the Commissioner was a judicial officer of the rank of

llfJZ

Joseph ¥ uruttilla

Volinkuitn.t

•• The Reserve Bank of

India

HidoyatuZlah J,

19/HI

J oie/JA Kwutoilla

Villu.!wvu I

•• .:- The Rt11rve Bank of Indio

Hiioy1llvllah J.

670 SUPRElIE COURT REPORTS [1962) SiJi>P.

a Subordinate Judge was considered enough for up

holding his adion as reasonable.

That every decision should be by the Court was thus not the proposition laid down. In fact, the case showH that it is not the sine qw1 n<m so long as a person trained to the task of deciding controversies does it according to a procedure in which parties can be said to have been heard fully.

We need not consider in detail the case of Ebrahim Vazir ilfavat v. 'l'he State of Bombay ('1, in which s. 7 of the Influx from Pakistan (Control) Act, 1949, was held void. Section 7 authorised the Central Government to remove from India, any person "who has committed or against whom a reasonable suspicion exists that he has committed, an offence under this Act •.. " In dealing with the section, this Court said ;

" .. : ... section 7 imposes the penalty of removal uot only upon a conviction under sectiC1n ii but goes further and brings about the same result even where there is a reasonable suspicion entertained by the Central Government that such an offence has been committed. 'fhe question whether an offence has been committed is left l'ntirely to the eubjective determination of Government." 'fhis Court pointed out that there was no opportunity to the offender to clear his conduct, and hold that this was "uothiI!g short of a travesty of the right of citizenship". The case is explainable on the ground that au Indian citizen has a fundamental right to stay in India and if h" is to be removed for eommitting an offence or under suspicion that he has committed an offence, the removal is a penalty which cannot be inflicted without an opportunity to the offonder to clear his conduct. Aij pointed out by llll already, while dealing with Thalcur Raghuhir Singh's case('), there is no question of a

(I) [1954) S.C.R. 933. (2) [l9S3J S, C.R. 1049.

3 s.d.R. SuPREME COURT REPORTS 6~1

punishment here, and there is, in fact, a hearing, though not before a Court. There is nothing in the Influx from Pakistan (Control) Act to show that the opportunity to clear his conduct of the alleged offence must be by resort to the Court.

The appellant also relied upon K. T. Moopil Nair v. State of Kerala (1), where a taxing statute was struck down on the ground that it provided no procedure for assessment of the tax, Abdul Hakim

v. State of Bihar'(') and State of Madhya Pradesh

v. Baldeo Prasad ('), but they do not deal with the point now raised, and were decided on facts which were entirely different. It will thus be seen that the wide proposition; that every determination affecting liberty, rights or property must always be made by . a judicial tribunal and none else, does not find support from the cases above considered. It is enough to say that the Reserve Bank in its dealings with banking companies does not act on suspicion but on proved facts.

These facts are statutorily required to be submitted to the Reserve Bank, and the Reserve Bank further inspects the banking companies. It licenses such banking companies as conduct their affairs in the interests of the depositors, and can withdraw the licence if they do not.

With such a statutory access to the affairs of a banking company, there is sufficient guidance in the words 'detrimental to the interests of the depositors' to show to the Reserve Bank when and how the power is to be exercised. Indeed, in this case itself, the Reserve Bank has given an easily understand able view of the monetary position of the Palai Bank. By comparing the total demand and time liabilities of the Palai Bank with the liquid assets, borrowing power aud realisable advances, the Reserve Bank has shown the inability of the Palai Bank to meet lawful demands, and a state of affairs is disclosed, which is certainly not beneficial to the


(2) [1961] 2 S.C.R, 610.

(3) [196111s.c.R.1910.

Ii>62

Joieph'/Curuoil/o

 Vellukunnel v.

Tlie•Reserve.Bank

India

 1 Hid/Jyalultah J.

J o,.plt K """1illa

VdlaNlnrl

•• Tli1R•s1tf11Bo11k. of

liidi•

lribyolwlloh J.

672 SUPREME COURT REPORTS (1962] SUPP.

interest of those unfortunate depositors, whose money is still involved. Tho Ueserv-e Bank has not y•it told ns all that it has found.

It will all ho found in the winding up proceedings.

But this seems certain that the action would not be taken without scrutinising all the evidence and checking and rechecking all the findings. It is impossible to say that observations in tho cases discussod above ean apply to the facts here.

The learned Attorney.-General, on the other side, drew our attention to Virendra v. 1'he State of Pm1jab (1), where it has boon pointed out that in

judiring the reasonableness of any particular law "the surrounding circumstances in which the impugned law came to be enacted, tlw underlying purpose of the enactment and the extent and urgenoy of tho evil sought to be remedied" must also be considerr.d. That case concerned the freedom of speech and its alleged curtailment by the Punjab Special Powers (Press) Act, 1956. In judging the reasonableness of the law from the angle o°f the exclusion of Courts, this Court observed:

"Legislature had to ask itself the question : who will be the appropriate authority to determine at any given point of time as to whether the prevailing circumstances roquire some restriction to be placed on the right to freedom of speech and expression and the right to cany on any occupation, trade or bussiness and to what extent ? The answer waa obvious, namely, that as the State Government was oharged with the preservation of law an order in the State, as it alone was in possession of all material facts it would be the best authority to investigate the circumstances and a88088 the urgency of the situation that might arise and to make up its mind whether any and, if so, what anticipatory action must

(I) [1958] S.C.R. 308.

' I

3 S.C.lt.

. ' ,. ) ' ., ~\ . ' _'

SUPREME COURT REPORTS 673

b~ taken for the prevention of the threatened or anticipated breach of the peace. The•court is wholly unsuited to gauge the seriousness of the situation, for it cannot be in possession of

materiafa which are available only to the executive Government. Therefore, the determination of the time when and the extent to which restrictions should be imposed on the Press must of necessity be left to the judg-' ment and discretion of the State Government and that is exactly what the legislature did by passing the statute ... ; ..... Quick decision and swift and effective action must be of the essence of these powers and the exercise of it must, therefore, be left to the subjective satisfaction of the Government ...... To make the exercise of these powers justiciable and subject to the judicial scruti; ny will defeat the very purpose of the enactment.'.' These observations lay down clearly that there may be occasions and situations in which the legislature may, with reason, think that the determination of an issue may be left to an expert executive like the Reserve Bank ratheu than to Courts without incurring the penalty of having the law declared void. The law thus made is justified on the ground. of expediency arising from the respective opportunities for action.

Of course, the exclusion of Courts is not lightly to be inferred nor lightly to be conceded.

The reasonableness of such a law in the total circumstances will, if challenged, have to be made out to the ultimate satisfaction of this Court, and it is only when this Court considers that it is reasonable in the individual circumstance that the

law will be upheld.

In the present case, in view of the history of the establishment of the Reserve Bank as a central

bnk or; India, it~ position as a Banker's Bank, its

JOseph Kuffl'l'illa

VellukuiiMI

The ReserVe Ba•k

of India

Hidayatullah J.

Jo#pla Kllf'tmU/a

YelMrmnel

T/i, R,,....,. Bank

of IN/ia

Hldq, at•llah J.

674 SUPREME COuRT HEPORTS (1962] SUPP.

control over banking companies and banking in India., its position as the issuing bank, its power to license ba.nking companies and cancel their licences and the numerous other powers, it is unanswerable that between the Court and the Reserve Bank, the momentous decision to wind up a tottering or un safe banking cow pa.ny in the inti)rests of the deposi tors, may reasonably be left to the Reserve Bank. No doubt, the Court can a)so, given the time, perform this task. But the decision haA to be taken without delay, 11nd the Reserve Bank already knows intimately the affairs of banking companies and has had access to their books and accounts. If the Court wore oallod upon to take immediate action, it would almot always be guided by the opinion of tho Reserve Bank. It would be impossible for the Court to reach a conclusion unguided by the Re

eerve Bank if immediate action was demanded.

But the law which gives the same position to the opinion of the leeerve Bank is challenj?ed as unreasonable. In our opinion, such a challenge has no force.

The situation that a.rose in this case is typical of the occasions on which this extraordi nary power would normally be exercised, and, aA

we have said alrea.dy, if the power is abused by tho Reserve Bank, what will ho struck down would be the action of the Heserve Bank but not the law.

An appeal against the Reserve Bank's action or a. provision for an ex post facw finding by the Court is hardly necessary. An appeal to the Central Govern mcnt will be only an a.ppeid from Caesar to Caesar, because th'e Reserve Bank would hardly act without the concu.rrence of the Central Government and the finding by the Court would mean, to borrow the macabre phrase of Raman Nayar, J., a. postmortem examination of the corpse of the banking company.

It io a matter of not a little interest that a. procedure for winding up other banks and institu tions to the exclusion of the Companies Act is to be

' ' 3 s.c.R. ~75

found in other statutes. The co-operative Societies, the State Financial Corporations, the State Bank of lndia, the Industrial Finance Corporation, the Life Insurance Corporation and finally, the Reserve Bank itself are to be liquidated under special laws to the exclsion of the Companies Act, under the statutes creatmg them.

In view of what we have said above, it is not necessary to refer to American and Japanese precedents. However, if these laws are examined, they show that even in the United States of America and Japan, the closure of bai; iks an~ also their liquidation proceed_ from executive action. Under the Banking Law of Japan( Law No. 21, March 30,1929), Arts. 22, 23, 24 and 27 provide that the competent Minister would decide such issues. Article 22 mey be read in this connection :

"If the competent Minister finds it neces- Ba!iJ}'. so to do in view of the affairs of a bank or the conditions of its property, he may order it to suspend business, deposit property with official depository, or issue any such order as may be necessary." (Japanese Laws Rela ting to BanksEibun-Horei-Sha, Inc. Tokyo Japan, p. VI (BA 4).

It is also interesting to note that Arts. 22 and 29 of the Japanese Constitution guarantee to the people the freedom to own property and choose occupa tions, much as has been done under our Constitution.

In the United States of America, Banks are regarded as proper subject of legislative regulation under the police power (Corpus Juris Secundum, Vol. IX. paras 4 and 5, p. 32), and this power is not subject to the limitations arising from the Fourteenth Amendment, except that it must be reasol).ably exercised. The Ba11-ks in the United States being

Jostph KUruvil/a

Vellufr.uunet

The Reserve Bank of India

Hida_Jr, tullah J.

Jouph Xutuflillo

Vellnkutmtl

•• 'I1I< Rmne Bank of

India

HiUJoJullaA J.

:fi'!'

676 SUPREME CoURT REPoRTs [1962] SUPP . • either National or State Banks, different laws have been framed to deal with the winding up of insolvent Banks. In almost all the States statutes provide spacial proceedings for the 'affairs of insolvent State Banks, and the National Bank Act also makes special provision in respect of National Banks. The closing of the doors of a National Bank by the Comptroller of Currency on account of its insolvency and the appointment of a receiver do not amount to a breach of the due process clause.

As stated in Corpus Juris Secundum, Vol. IX, para 419, p. 835 :

 "The courts have generally upheld the validity of statutes providing for the liquidati'ltn of state banks, including tho control • and administration .of the assets by state officials or by receivers or liquidators appointed by them, the determination of the bank's

solvency, claims against the bank ... ".

The power is thus conferred on the Comptroller of Currency by the l'iational Bank Act and by the State law upon the superintendents of Bauks.

Under somo statutes of the States, banking officials have no power to liquidate iusolvent Banks independently of the judiciary. But in others, this power is specifically conferred.

These propositions were cited to us from American Jurisprudence Vol. 7, Vols. IX, XIII and XVIA of Corpus Juris Socundum and from tho Law Reports, particularly Title Guaranty and Surety Co. v. Idaho Ex Rel.

Allen ('), Bushnell v. Leland (), Ex parte.

Chetwood (') and some others.

Mr. Nambiar, however, joined issue on the ueo of the American precedents on the grounds that banking in Amcrca is. by gra?o. of legislture, and is either a francb1so or a pr1v1legc, which has no place in our Constitution.

He added that the

. (l)(l!ll6l240)'C.S.130:60L. cd.!'166.

(2) (1697 16' U.S. 684, 41L.ed.598.

(3) (1897) lfS U.S.443,41L. ed. 782.

- a s.c.R.

SUPREME COURT REPORTS 677

carrying on of business is not one of the provisions of the American Bill of Rights, nor a fundamental right, as we understand it, though by judicial construction the individual right has been brought within the Fourteenth Amendment. He, therefore, contended that American cases and American laws should not be used. In our opinion, no useful purpose will be served by trying to establish the similarities or discrepancies between the American Constitution and b:tnking laws, on the one hand, and our Constitution and our banking laws, on the other, and we do not wish to rest our decision on the American and Japanese analogies.

We do not also agree that the impugned section amounts to an encroachment on the judicial power by the legislature. The statute book is full of instances in which the Courts of Civil Judicature guide themselves by the decision of an outside agency .. The Arbikation Act itself affords a readily available instance. Under that Act the Court passes its.decree on an award of almost any one the parties may choose. Nor is the posibility ofa mistake by the Reserve Bank of such vital consequence. If the Reserve Bank acts in good fa.ith and with circumspection, there is as 'much or as little chance of error as before a Court of law.

Lastly, we do not think that this was a case in

whih some lesser acti?n like moratorium or amalgamat10n or reconstruct10n would have been feasible The difficulty of the Palai Bank was the nature of it~

advances, which were either not recoverable or not easily recoverable. A moratorium v. ith the limitation of ime involved in it would not have been an adequate mPasure, and amalgamation and reconstruction were out of question at the stage which had been reached.

We are thus satisfied that ss. 38(1) and (3)(b )(iii) of the Banking Companies Act are neither - . - . . '

. J .. eph Kld'uvill•

Vellukunne/

•• The Reseroe Bank

of India

Hid a ya tu/lab I.

Joseph Kur""iUa

Vtllukunnel

Tiit R1sttVt Bank of

Indio

Hido)"aJull o/a J.

Kt1pur .!.

678 SUPREME COURT REPORTS [1962] SUPP.

discriminatory nor unreasonable, and cannot be declared void und11r Arts. 14 and 19 of the Constitution. Since the provisions are manifestly in the public interest, they cannot also be declared ultra vires under Art. 30 I, because they are protec. ted by Art. 30l of the Constitution.

The appeal and the petition thus fail, and arc dismissed with costs one set only.

KAruR, J.-Thc facts of this•case have been set. out in the judgment of our learned brother Hidayatullah, J., and it is not necessary to restate them.

The main question for decision is whether the provisions of s. 38(3)(b)(iii) of the Banking Companies Act (Act X of 1948) are 1dtm vires of the Constitution as being unreasonable restriction which infringe the petitioners' right under Art. 14 and Art. 19 ( l)(f) and (g) of the Constitution.

Under s. 38(3)(b)(iii) of the Banking Companies Act the winding up petition was filed •by the Reserve Bank of India against the Palai Bank Ltd., in the Kerala High Court on August 8, 1960. On the same day an application for the appointment of a Provisional Liquidator was also made and a Provisional Liquidator was appointed. On behalf of the Directors an objection was taken in the High Court that s. 38(3) (b) (iii) was invalid and unconstitutio1ml because it contravenes Arts. 14 and 19 of the Constitution and that the petition was mala fide.

After the appointment of the liquidator four scheme of arrangement under s. 44B of the .Banking Companies Act were presented to the Court. On October 6, 1960, the Court ordered the Reserve Bank to examine the work ability and effinaey of the schemes. l'he Reservo Bank of India filed its report on October 22, l!lGO, to the effect that prim.£1 f acie the schemes wer<i not workable.

Th" order

3 S.C.R. SUPREME COURT REPORTS 679

of winding up was then passed on December 5, 1960.

The plea of mala fides was not pressed and the High Court held that there was no infringement of the petitioners' right under Arts. 14 and 19. The Court also held that although according to the language used in the impugned provision the Reserve Bank of India need not have disclosed the material on which it arrived at the conclusion that the continuance of the Palai Bank was prejudicial to the interest of the depositors, it had chosen to place all the materials before the Court which showed that ever since 1952 the Reserve Bank of India was drawing the attention of the Palai Bank to the grave defects in its working and had given it opportunities to explain the defects or to remedy them. The Palai Bank chose to do neither and "the Reserve Bank far from having acted without material or in a hasty and ill-considered manner, had, doubtless alive to grave responsibility placed upon it to preserve the banking structure of the country, acted with a degree of care and circumspection which has drawn to it adverse criticism from those who do not share its responsibility. Faced with the run it would.have failed in its duty by the depositors had it not acted as it did." . - The history of the Banking Companies Act and how it came to be enacted is this. The Government of India appointed the Indian Central Banking Enquiry Committee which made its report on June 2, 1931. In para. 674 it. pointed out the principal causes of failures of Banks.

By Act 2 of 1936 Part XA was introduced into the Indian Companies Act of 1913 and that part dealt with B1tnking Companies but no separate and special provision was made for the winding up of banking co.mpanies. ' In 1934 the Reserve Bank of India Act (Act JI of 1934) was enacted.

There were minor amendments in the Indian Companies Act in regard to Banking Companies by Acts 2l

Joseph Kurnvilla

Velluktmnel

•• The Reserve Bank of India

Kapur J,

J osqh Eur.., illa

Vrlluk.,,,,, I

•• Th~ Rtse•vt Btmk oj . l•dia

Kapur J.

680 SUPREME OOURT REPORTS [196~] SUPP.

?f 1942 and 4 of 1944. On January I 5, 194.6 Bank

mg Companies Ordinance (4 of l!J46) was promulgated which enabled the Central Government to direct the lfoservo Bank to cause inspection to be made of any hanking company and its books and accounts. It empowered the Central. Government, on the receipt of a report that the affairs of a banking comp11ny were being conducted to the detriment of the interest of the depositors, to prohibit the banking company from receiving fresh deposits or to refuse it to be placed in the schedule of the Reserve Bank of India Act or to de-schedule it. On March IO, 1949, tho Banking Companies Act (Act X of Hl49) was passed. On December 31, 1952, the Banks' Liquidation Proceedings Committee of 1952 mado its report. According to that report the number of bank which. suspended payments during the year l!l26 to 1952 was 351. The total liabilitieR of these banks wi:re Hs. 96·86 lakhs.

Of these banks 12:~ were in Travancore-Cochin which were the most numerous. Then it was stated how many banks. failed during different periods

and it was pointed out that the slow progress of liquidation proceedings was due to the facts that the advances wro mostly unsecured and recovery involved litigation, so much so that thore were not enough funds to take logal proceedings ; many claims were barred by limitation : contribut-0ries could not be traced and the unpaid capit&l could not be recovered. In cases of small 'banks advances were small and legal expenses for realisation were ont of proportion to the amounts involved and the claims had therefore to be given up and the Directors invariably delayed the submission of their statements under s. 177 A of tho Companies Act and this hampered the progress of the liquidation proceedings. The Ba.nking C?mpanies Act wa<i then amended from time to time and b~' s. 26 of Act ~3 of 195!) the present s. 38

3 S.C.R.

SUPREME COURtT :kEPORTS 681

providing for winding up was substituted inplace

of the old. s. 38.

In order to determine the constitutionality of the impugned provision it will be helpful to examine the scheme of the Reserve Bank of India Act and of the Banking Companies Act. The preamble of the Reserve Bank of India Act is that it has been constituted with a view to ensure monetary stability in India and to operate the currency and. credit system of the country. By s.3 'the Reserve Bank has been established for the purpose of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of the Reserve Bank Act. Section 7 deals with management and it gives to the Central Government, the power to give such directions to the Bank after consultation with the Governor of the Bank which are considered necessary in the public interest. The Central Board. of the Bank is constituted under s. 8 and it consists of the Governor four Directors nominated by the Central Government from amongst the local Boards, six Directors nominated by the Central Government and one Government official to be nominated by the Central Government.

In other words all the Directors are nominees of the Central Government.

By s. 11 the Central Government has the power of removing the Gover nor or any Director and casual vacancies are also. to be filled by the Central Government under s. 1!.

Section 17 de'lls with the business which the. bank may transact and Chapter III relates to Central banking functions. Under s. 30 the Central Go.vern. ment has the power to supersede the Central Board and to entrust it to such agency as it may determine.

It will thus be seen that the Reserve Bank is an institution established for the purpose of carrying 011 central banking functions and its management is entirely in the hands of the Central Government oritsonominees;· · ·

Joseph Kuruvilla

Vel/ukunrul

The Reserve Bank

of, l~ia

Kopur J.

/962

J otpla /( 111uvilla

V1llukunntl

v. 7'/ie lltstrt11 Banlc

India

IropurJ,

682 SUPREME COURT REPORTS [1962] SUPP.

Section 2 of the Banking Companies Act provides that the provisions of that Act are in addition to and not, unless expressly so prodded, in derogation of the Companies Act., Hi5tl, and any other law for the time being in force.

Section 4 gives the Central Government the power to suspend the operation of the Act on the representation of tho Reserve Bank.

Section 5 is the iuterpretation clause.

Part H deals with 'Business of the Banking Companies". Section 11 in that Pa7t deals with requirement as tu minimum paid up Capital and reserve of banking companies. Section 22 empowers the Reserve Bank to give licences to banking companies, and prohibits the carrying on of hanking

b1JSiuess without a licence issued by thu Hsorve BAnk which may be issued subject to &uch conditions as thP Reserve Bank thinks fit.

Every hanking company in existence at the commencement of this Act had to upply for surh 11 licence .within six months of the commcncement of the Act and every

other company had to apply before commencing hanking business but com panics which were in existence could continue t.heir hanking business until the licence was granted or it was rc61serl. Hut it could not be refused before the expiry of threo ye1us refcrnd to in sub-s. (I) of"· 11 Sub-section (:l) of that section entitles th(l Hesen-o Bank to inspect

hooks of the Banking company to satisfy itself in regard to matters contained in that sub-section.

Undor sub:s. (4) the Reserve Bank can cncel :i licence granted to a banking company provided that before cancelling the licence it gives an opportunity to tho Banking Company to show cause why its licence should not ho cancelled.

U!Hlor sub-s. (ii) auy banking company av.urieved by the order of

I.be Reserve Bauk cancelling its licmr.u can appen.l to the CenLrnl Government whnsc de,, i, ion is final.

Cnder s. 24 every banking company bas to maintain a percentage of its asi; ets iu cash, gold or

3 S.C.R.

SUPREME COURT REPORTS 683

unencumbered approved securities and an amount which is not less than 20% of the total of its time and demand liabilities and return to that has to be furnished periodically to the Re$erve Bank. Section 25 deals with assets of every banking company in India, s.27 with the making of monthly returns by the banking companies to the Reserve Bank and s. 30 with audit. The Reserve Bank under s. 35 may at any time and on being directed by the Central Government shall cause an inspection to be made of any banking company. Sub-section (4) of that seetion reads:-

"The Reserve Bank shall, if it has been directed by the Central Government to cause inspection to be made, and may, in any other case report to the Central Government on any inspection made under this section, and the Central Government, if it is of opinion after considering the report that the affairs of the banking Company are being conducted to the detriment of the interests of its depositors may, after giving such opportunity to the banking company to make a representation in connection with the report as, in the opinion of the Central Government, seems reasonable by order in writing.

(a) prohibit the banking company from receiving fresh deposits;

(b) direct the Reserve Bank to apply under section 38 for the winding up of the banking company:

Provided that the Central Government may defer, for such period as it may think fit, the passing of an order under this sub-section, or cancel or modify any such order, upon such terms and conditions as it may think fit to impose." '

 Joseph K uruvill" Ve/Julcunnel

The Re1erve Bank o India ·

Kapur .J.

1&111

.lostph Knnwillo

Y1Jlulcun111l

Y. -ht BtstTOt BaU of

lrtJia

Kapur J,

684 SUPhEME COURT REPORTS (!962] SUPP.

Under s. 35A power is given to the Reserve Bank to give directions. When quoted it reads:

S. 3:iA( I) "Where the Hoserve Bank is

atisfied that-

(a) in tha public interest; or

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the inkrests of the depositors or in a manner prejudicial to the interests of tho banking company; or

(c) to secure the proper management of any banking company generally;

it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time issue such dinctiom as it deems fit., and the banking companirs or tho banking company, as tho case may be, shall be bound to comply with such directions.

(2) The RcHerve Hank m>iy on representation nmde to it or on its own motion, modify or cancel any direction issm'd under subsection(!) and in so modifying or cancelling any direction may imposo such conditions as it thinks fit,.subj., ct to which th" modification or canccllntion shall ha\'C offect."

Section 36 defines further powern and functions of the Reservo Ua.nk. It has power t.o caution or to prohibit a banking company from entering into any particular transact, ion or class of tran8aetions, to assist any proposal for amalgllmation of compani<lS, to give loans to banking companies, to requirn banking companies o <'all a meeting of the directors for the purpose bf considering a.ny mat tcr re la ting to

or arising out of tho affairs ot the banking company . '

3 s.c.R. sbi>REME cotJRT REPORTS .685.

to depute one or more of its officers, to watch proceedings at any meeting of the board of directors, to appoint one or more of its officers to observe the manner in which the affairs of the banking company are conducted or to require the banking company to make such changes in the management as Reserve bank may consider necessary.

Part III deals with suspension of business and winding up of banking companies. Section 37 provides that on the application of a banking company the High Court may stay commencement or continuance of all actions against a banking company and may impose a moratorium; but the application is not maintainable unless it is accompanied by a report of the Reserve Bank indicating that in the opinion of tbe Reserve Bank the banking company will be able to pay its debts if the application is granted, provided that the High Court may for sufficient reason grant relief under this section even if the application is not accompanied by such report.

In that case the High Court shall call for a report from t~ Reserve Bank on the affairs of the banking company and pass such order as may be proper in the circumstances. Under sub-section 3 the High Court can appoint a special offi\ler to take into custody or control all assets, boo)l:s and documents of the banking company and shall exercise such other powers as it thinks fit having regard to the interests of the depositors of the banking company. Under sub-s. 4 if the Reserve Bank is satisfied that a banking company in respect of which an order has been so made conducts its affairs in a manner detrimental to the interests of its depositors it can make an application to the High Court for the winding up of the company and where such an application is made the High Court shall not make" any order extending the

J01eph KuYuvilla.

Vel/ukwmel ' v.

The Reserve Bank of India

KapurJ.

Josth KuruVilla

Yellukunntl ·

v. •e !l, snce Bank of Indio

Kapw J.

686 SUPREME COURT REPoRTS [1962] SUPP.

period.

The impugned provision of section 38 which deals with winding up reads : -

S. 38 (l) "Notwithstanding anything contained in section 391, section 392, Rection 433 and section 583 of tho Companies Act, 1956 but without prejudice tu its powers under sub sect ion ( l) of section 3i of this Act the High Court shall order the winding up of a banking company -

(a) if the banking company is unable to pay its debts ; or

(b) if an application for its winding up has been made by the Reserve Rank under section 37 or this section.

(2) The Heserve Rank shall make an application under this section for tho winding up of a banking company if it is directed so to do by an order under clause (b) of sub sec. tion (4) of section 35.

(3) The Reserve Bank may ke an application under this section for the winding up of a banking company -

(a) if the banking company -

(i) has failed to comply with the requirC>ments specified in section 11 ; or (ii) has by reason of the provisions of section 22 become disentitled tt> carry on banking business "in India; or (iii) has been prohibited from receiving fresh deposits by an order under clause (1) of sub-section (4) of section 35 or under clause (b) of sub-section :l(A) of section 42 of the Heserve Bank of India Aot, I 934 or;

3 S.C.R.

SUPRME COURT REPJRTS

(iv) having failed to comply with any requirement of this Act other than the requirements laid down in section 11, has continued such failure, or having contravened any provision of this Act has continued such contravention beyond such period or periods as may be specified in that behalf by the Reserve Bank from time to time after notice in writing of such failure or contravention has been con veyed to the banking company ; or

(b) if in the opinion of the Reserve Bank- ( i) a compromise or arrange ment sanctioned by a Court in res pect of the banking company cannot be worked satisfactorily with or with out modifications ; or

. (ii) the returns, statements or information furnished to it under or in pursuance of the provisions of this Act disclose that the banking com pany is unable. to pay its debts ; or

(iii) the continuance of the banking company is prejudicial to the interests of its depositors.

( 4) Without prejudice to the provisions contained in section 434 of the Companies Act 1956, a banking company shall be deemed to be unable to pay its debts if it has refused to meet any lawful demand made at any of its offices or branches within two working days if such demand is made at a place where there is an office, branch or agency of the Reserve Bank or within five working days, if such demand is made elsewhere, and if the Reserve

Jos'e/ih K'U1'Uvilla

Vellukunrul ..

The Reserve Bank '

of lndfr;

Kapur J,

•• •

Jouph Kurutilla.

V tllu.lww I

Tiu R~,, lit Bank:.

nj India

~ , . ' ,

688 SUPREME COURT REPORTS (1962] SGPP.

Bank certifies in writing that the banking company is unable to pay its debts.

(5) A copy of every application made by the Reserve Bank under su b-suotion (l) shall be sent by the Iteserve Bank to the registrar." Section 44A lays down the procedure for amalgamation of banking com panics and s. 44 B for restriction on tho powers of the High Court to sanction compromise or arrangement between a banking company and its creditors unless compromise or arrangement is certified by the H.escrve Bank as being capable of being worked as not being detrimental to the interest of tho depositors.

Section 45 giv1s to the Reserve Bank the power to apply to the Central Government for an order of moratorium in respect of banking company which the Central Government may order and it also gives to the Reserve Bank the power to prepare a scheme for reconstitution or amalgamation. Sub-section (I) and

(2) of s. 45 are as follows :-

S. 45( I) "Notwithstauding anything contained in the forngoing provisions of this Part or in any other law or any agreement or other instrument for the time being in force, where it apprars to the Hcserve 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 com

pany. (2) The Central Government, after considerng tho application made by tho Reserve Bank under sub-section (I) may make an order of moiatorium staying the commencement or eontinuance of all action and proceedings against the company., for a fixed period of time on such terms and conditions as it think fit and proper' and may from .time to time

3 S.C.R. sbPR~ME COURT REPORTS 6s9

extend the period so however that the total period of moratorium shall not exceed six

months." It will thus be seen that the Banking Companies Act gives very extensive powers to the Reserve Bank in regard to hanking companies. It gives to the Reserve Bank the power to license existing banking companies or the banking companies, which want to commence business, and for that purpose it can inspect the books of the banking company in order to determine whether it is or will be able to p11.y its depositors. It can cancel a licence in certain circumstances but after giving to the hanking company, an opportunity to be heard. A banking companies is required to keep a portion of its assets in a liquid form the Reserve Bank can order inspection of any banking company at any time it thinks proper and Central Government can order the Reserve Bank to make an inspection of any banking company and on that report drastic steps against the <:>ompany may follow.

The Reserve Bank can give directions as to how the business of a banking company shall be conducted. It can appoint observers and give directions to the directors of a banking company as to what they should do or should not do. Moratorium can be imposed by the High Court at the instance of a banking company but the Reserve Bank may have that order varied and set aside if the order is not in the interest of the depositors and if the Reserve Bank thinks that the continuance of a banking company is not in the interest of the depositors it may apply to the High Court for winding up of the banking company. In regard to amalgamation of banking companies through scheme of compromise and arrangement the Reserve Bank has a great deal of control and power.

The Reserve Bank may apply to the Government to impose a moratorium on any banking company and if an application is so made the

Joseph Kuruvilla

VellukUnn•I

•• The Reserve Battle

Of india

!fopur J.

19~2

Jos1ph Kurouil a

V ellulrunntl

•• Tiu H1sert>e Bartk

o/ l•tUa

Ka/I"' J.

690 SUPREMR CotJRT REroRTs [1962] SUPP.

Covernment may make such an order.

But who.- it comes to winding up prnvisions tho Reserve Ban'. has precmptory powers, in that if it applies fm

the winding up of a banking company the Court

is bound to order winding up because the words used are "the High Court shall" order the winding up.

Moreover the Government can direct the Reserve Bank to make such an application so that the Executive Government can take any banking company into liquidation. The power given in su'b-s. (3}(b}(iii) of s. 38 is still more drastic because if the Heserve Bank is of the opinion that the continuance of a banking company is prejudicial to the interest of tho depositors it may apply for winding up; in other words on its subjective satisfaction it may apply and if it docs so the High Court has no option but to order the winding up it is t.his provision to which strong objection has been taken by the appellant and is assailed by him.

This provision was sought to be supported on behalf of the Iteserve Bank by tho learned Attorney-General who first drew our attention to the facts of the present case and to the various opportunities which were given to the Palai Bank since 1952 to carry out certain directions and on different occasions the Palai Bank had made representations an<l its Directors ha<l interviewed the officers of the Reserve Bank and had given explanations till ultimately on July 21, UJ60, the Roserve Bank called upon thl• Palai Bank to carry out certain directions which were onclosc<l with the letter. The Reserve Bank there wrote as follows :

"The bank should therefore, in the interest of its depositors remedy within a period of 12 months the features observed in its working." It was also stated therein that if the l'alai Bank desired to make any ropreentfltion in r1, gard to contents of the iuspection report it could 1aake its

3 s.c.:k.

SUPREME COURT REPoRTS G9i

representation within 30 days of the receipt of the letter and the complaint of the appellant is that before these thirty days were over winding up application was made on August 8. 1960, which the Re. serve Bank submits was for very good reasons, the protection of the interest of the depositors.

The test of reasonableness has to be applied to each individual statute and no abstract standard or general pattern can be laid down which will be applicable to all cases: l'atanjali Sastri, C.J., in State of Madras v. V. G. Row (I) observed:

"The formula of subjective satisfactfon of the Government or of its officers, which an advisory Board thrown in to rev, iew the materials on which the Government seeks to override a basic freedom guaranteed to the citizen, may be viewed as reasonable only in very exceptional circumstances and within the narrowest limits, and cannot receive judicial approval as a general pattern of reasonable restrictions on fundamental rights." See also Abdul Hakim v. State of Bihar (') Although the legislature is the best judge of what is good for the community ; State of Bihar v. Kameshwar Singh(') the ultimate responsibility for determining the validity of the law must. rest with the Court and the Court must not shirk that final duty cast on it by the Constitution.

Abdul Halcim's case (2).

It was submitted by the learned Attorney-General that ( 1) reasonableness of the impugned legislation has to be judged in its own setting and not on any abstract test and (2) that the absence of judicial scrutiny is not an inviolable rule. It can be dispensed within certain circumstances as being unsuitable or defeating the purpose for which an .1\ ct is passed. In support of the former he relied upon the observations of Patanjali Sastri, C. J., in

(!) [1952) S.C.R. 597,607,603.

<2) [1961) 2 S.C.R. 610.

(3) [1952) S.C.R. 88~.

Joseph Kuruvilla

Vellukunnel v.

The R eseroe Bank

of India ---· Kapur J.

J9GJ

Joseph K utUViUa

Vtll1J;•mtttl

Tht Rt.J1"" Bont •! l•dia

KapurJ.

g92 SUPREME OOURT REPORTs [1962] SUPP.

SfAJIR, of Madras v. V. G. Row (1) where the learned Chief Justice observed :

'•The nature of the right alleged to havo been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict."

and also to the following observation at p. 608 :

"As pointed out by Kania, C. J., at p. 121 quoting Lord Finlay in Re:.c v.

Halliday (1917) A. C. 260, 269. the court was the least appropriate tribunal to investigate into circumstances of suspicion on which such anticipatory action must be largely based." But in that very case tho learned Chief Justice pointed out that the formula of subjective satisfaction of the Government with an Advisory Board thrown in to review the materials on which the Government seeks to override a basic guaranteed freedom can be viewed as reasonable only in vory exceptional circumstances and within the narrowest limits and cannot receive judicial approval as a general pattern of reaaonablo restriction. In that caae the court did not find any reasonableness in the claim of the Government to shut out judicial enquiry into the underlying facts.

In support of the second submission reference was made to V irendra v. 'l'he Slaw of Punjab (') whore the constitutional validity of a Puujab Act which prohibited the publication by the Editor and Printer of any matter relatin11 to tho

"Save Hindi" agitation was challenged. 'The question raisod there was, are the restrictions imposed

ilJ [1952J s.c.R .• 597, G07, b08.

(2) [1958] S.C.R. 308.

3 S.C.R.

SUPREME COURT REPORTS 693

reasonable in view of all the surrounding circumstances. In other words were they reasonably necessary in the interest of public order under Art. 19(2) or in the interest of general public under Art. 19(6).

Das, C.J., there observed that the legislature had to ask itself the question as to who would be the proper authority to determine at any given time as to whether the prevailing circumstances required some restrictions on the right to freedom of speech and expression and the answer was obvious that the State Government was charged with the preservation of law and order ; it alone had in possession all the material facts and it would be the best authority, to investigate the circumstances and assess the urgency of the situation and make up its minde as to what anticipatory action must be taken for prevention of the threatened or anticipated breach of peace :

"The court is wholly unsuited to gauge the seriousness of the situation, for it cannot be in possession of material which are available only to the executive Government. Therefore, the determination of the time when and the extent to which restrictions should be imposed on the Press must of necessity be left to the judgment and discretion of the State Government and that is exactly what the Legislature did by passing the statute." This passage from the judgment of Das, C.J., and the passae fron the judgment of Patanjali Sastri, C.J., in State of Madras v. V.G. Row (1) where reference was made to the observations of Kania, C.J .. were strongly relied upon by the Attorney-General in support of his contention that the power given to the Reserve Bank in regard to winding up and the mandatory provision for the order for winding up by the court were reasonable restrictions; because the judge of the urgency and of the measures to meet the urgency could be the Reserve Bank or te ooilrti

11) (19521 s.c.R. 597~ 607~ oa.

Joseph .Eunroilla

V.flukunnel

•• The Reserve Bank

of India

KapurJ.

Joseph K u,,1oilla

V tl lukunnel

v. :r .i, Rejt''' Bank

of lndii

Ka/iur .f.

694 SUPREME COURT REPORTS [1962] SUPP.

and the legislature had rightly given the power to the Jteserve Bank, because it was in possession of all the materi11.I facts and was the best authority to invest.igate the circumotances and assess the urgen

cy of the situation. The analogy between Virendm's case(') and the present case is, in our oi; inion, wholly in apt. In Virendra's case(') there was an agitation by a section of the Punjab public which Wfll! likely to have serious consequences on the public order and the tranquility of the state. It required quick measures to rontrol it. The order wa.s to meet an emergency, the order could at the most remain appliea-

Me for two months and tli ere was a provision for making a reprosontation to the Government. In the ca.so of a banking company, assuming that an urgency like that which exi"ted in Virendra's case(') arioes and a propor caso is made out tho Court will act with promptitude make such interim orders as the facts of the case may require e.g. the appointment of a provisional liquidator. Thoro is omi esHential difforence between V. G. Row's ca.!€{') and Virendm's case (')and the one before us.

In the former two cases executive action of State Government \vas challenged. The Court there had not to give a judicial vordict in accordance with the opinions of the exeeutivo but had to determine tho constitutionality of action already t.1.kcn.

It did not pass an order, judgment or decrco in acc:ordanco with the subjective determination of the Executive but expressed the opinion that in the circumstances there was no infringement of constitutional rights.

In the presont case the Court is debarred from deciding the adequacy of tho actb of mismanagemen't and the parlous state of it8 finances alleged against the Palai Hank. Besides tho complaint before us is not that tho Reserve Bank should not have filed an application hut that tho court could not order liquidation till after it had heard the Palai

(I) t19l8] s.c.R. JOS.

(2) [l9l2:S.CR. 597, 607, GOB.

~ S.C.R.

SUPREME UOURT REPORTS 695

Bank in its defenoe and had afforded it an opportunity of meeting the allegations in the winding up petition. In other words a law which authorises a banking company to be condemned unheard merely on the subjective satisfaction of one of the suitors even though it was the Reserve Bank is unconsti. tutional.

It was next contended that the provision of s.38 of the Banking Companies Act were not so unusual and that in other countries in similar circumstances much wider powers had been given in regard to the winding up of banking companies.

Reference was made to the National Bank Act in. the United States Code, s.191 of which deals with general grounds for appointment of receivers. It provides inter alia that whenever the Comptroller snail be satisfied of the insolvency of a national .

banking association, he may, after due examination of its affairs appoint a receiver who shall proceed to close up suoh association and enforce the personal liability of the shareholder. It also empowers the

Comptroler to appoint receivers for insolvent national banks and to make rateable assessments upon the stookholders but do not vest judicial power in him in violation.of the Constitution. The power of the Comptroller is exolusive and not subject to review of all matters properly within his discretion.

A national bank in America is a banking corporation organised by private persons and operated for private gain, the power and duties of which are defin. ed and limited by Acts of Congress, providing for creation and liquidation of such institutions and being established to aid or promote governmental purpose and to provio0 national cul'rency they are often regarded as public or quasi-public institutions.

Reference was next made to 92 American L.R, (Annotated), pp.1257-58, which deals with the constitutionalit, Y of the power given under tqe

Joseph Kuruvill4

VeUukunnel

The Res11ve Bank

of India

Kapur J.

Josep1; K"wu11illa

YtlJukunMl

Th• Ruerre Bank

' of lndia

K"'PUT J.

696 SUPREME OOURT REPOR~ [1962] SUPP

statute conferring authority upon the Ba.nk Commissioner to wind up the affairs of the Bank. It is there stated that the fact of insolvency having been discovered t.he statute directs the Bank Commissioner's course and the designation by him of a person to wind up the affairs of tho Bank which is no more a judicial a.ct than his ord'3r to the Board of Directors to remove a dishonest cashier. "His powers are purely administrative, and in no way infringe upon the ancient authority of courts dotermine ri!lhts of porson a.nd property in specific controversies pending before them."

Hoference was also made to Corpus Juris Secundum, Vol. IX, p.844, para 425, whore it is stated tha.t under some statutes banking officials liquidating a Bank are not subject to the directions of a court.

Again reference was made to Corpus Juris Seeundum, Vol. l6A, pp.1219-1220, para. 711, where similar statement is made in regard to the same statutes. But the following passage from that paragraph is significant:

•'Legislation is in contravention of the guaranty where it takes away one's property and leaves him no remedy whatever by which he can regain it or obtain redress.''

In Corpus Juris Secundum, Vol. 16, p.506, para. I 17, it is stated that appointment of a receiY.er, in certain instances, does not porforce violate constitutional provisions with. regard to separation of legislative and judicial powers.

So the appointment of a receivor hv the legislature to settle the affairs of an insolvent bank has been held not to be a judicial act but where the came is properly before a court the appointment of a receiver

const.ituts a judicial function witho-qt the scope of legislative control. ·

3 S.C.R.

SUPREME COURT REPORTS 697

It was then submitted that in America closing the doors of a bank without awaiting court's orders is not. a violation of due process of law. See Title Guaranty & Surety Company of Scranwn v. State of Idaho(') where it was held that the State's power to put upon a Bank Commissioner the duty of closing the doors of State Bank if, on examination, it is found to be in sol vent without a waiting judicial proceedings is not a violation of the due process of law, but it appears that the proposition that such a power was a violation of the 14th Amendment had not been 1trgued in the State Court. The following observations of Mr. Chief Justice White at p.569 are significant.

"We say this because, in its opinion, the court observed that if that was the contention, it was irrelevant, as the statute did not authorise liquidation except as a result of judicial proceedings although they did impose upon the bank commissioner the duty, after he found a bank to be insolvent, to close its doors and prevent the further transaction of business until, in the orderly course of pro cedure, a judicial liquidation might be accomplished." The only question there was whether the State could empower the Commissioner to close the doors of a bank It was not a case where the statute authorised any liquidation except as a result of judicial proceedings. Therefore it was not a case of liquidation being ordered by an authority other than a court.

Another case relied upon was Bushnell v.

Leland(') where the aseessment made upon stockholder of a national bank by the Comptroller of Currency was held to be .evidence in an action brought by the receiver of a bank against a stockholder to enforce payment of double liability imposed (I) (1916) 240 U.S. 136. 60 L. Ed. 566.

(2) (1897) 164 U.S. 684. 41 L. Ed 598.

Joseph K'uruDil/a

Vel/t1kunn

Th,. Re.'trve Bank of

Inditt

K, zpur J .

.I oStph Km UDillo

Vrllul; unnel

" 1 he Restrl;6 Bank of

JndU.

Kapur J.

698 SUPREME COU.RT REPORTS [1962] SUPP

by law. It was also hold that the giving of authority to tho Comptroller etnp:)1ve:ing him to make a rate:ible call upon stockholder was not t:mtamount to vesting that officer with judicial powcr. In Bx parte J o!un Chelwood (1) it was held that the recei- V(Jr of a national bank appointed by the Comptroller of Currency is not an officer of any court but agent and officer of the United States.

The aid of Amerimn concopts, laws a11d precedcnU! in thl' interpretation of our laws is not always without its dangers and they have tlwrefore to Le rnlied upon with some caution if not with hesitation beca1rnc of the difference in the naturo of those hws :tnd of the institutions t.o which they apply.

Mr. Nambiyar rolied upon these different concepts and submitted that in U.S.A. the right to carry on business is not a fundamental right but is a "franchise", though, it has hy legal intcrprctntion, been brought within the fourteenth amendment and the doctrine of "franchise" has no place in the

Indian Constitution : C.S.S. Motor Ser•.•ice v. State of Madm.s (') approved in Sarthfr Ahmad v. Sfitte of

U.P. (').

Similarly the right to form a corporation is in C.S.A. a "franc:hise" or a "privilege" which can be withdrawn. To apply the analogy of Banks in U.S.A. to thoso in Inclia or the mode of exercise by and extent of the powers of a Coritrollcr of Currency or some similar authority will moro likely than not lead to erroneous conclusions.

To support the submission that this procedure for winding up in t:ho case of bankin~ companies was not unreasonable, it was fmbmittPd that there arc many other corporations and socict ics which arc not wouncl uncfor the Companies Act but under a clitTnent procedure- by the orders of the Central Governrncnt-e.g. the Life Insurance Corporation, the tat<' Finanee Corporation, the State Bank of

(II (1897) 165\..:.S.4·13 41 L.Ed.7112

(2) J.L.R. [1953] Mad. 304.

(3) (1955] 1 s.c.R, 707, 718,

3 S.C.R.

SUPREME COURT REPORTS 699

India and some others. They are all owned by the Central Government and ave therefore not comparable with the respondent company. Besides merely because some other corporations or societies of a different kind can be wound up in a different manner or under a special procedure is hardly a ground for holding in favour of the constitutionality of the imi:mgned provision.

To further support the reasonableness of the impugned provision it was argued that because of the special knowledge of financial matters possessed by the Reserve Bank and to protect financial structure of the country special powers have been conferred on the Reserve Bank and the learned Attorney-General relied on the observations of Rajagopala Ayyangar, J., All India Bank Employees' Association v. National Industrial Tribunal (I) :

"From what we have stated earlier as the genesis of the legislation now impugned it would b.e apparent that Government bad to effect a reconciliation between two conflicting interests ; one was the need to preserve and maintain the delicate fabric of the credit. structure of the country by strengthening the real as well as the apparent credit-worthiness of banks operating in the country." But that was in a different context. That was a matter in regard to the provisions s.34A of the Banking Companies Act, sub-s. (1) of which gives immunity under certain circumstances to books and accounts of a banking company against production and inspection in a proceeding before the Industrial Tribunal and sub-section ( 2) of which provides that if in any proceedings in relation to any company other than the Reserve Bank any question arises whether the amount of reserves should be taken into account by the authority before which snob proceeding is pending the authority may refer the questio~ to

(I) [1962] 3 $.C.R. 269, 298.

W6Z

Joseph K ;.iruvil/o

Vellukunnel

The Reserve Bank of

India

Kapur J,

J or1pli KllfZlVilla

l'11lu!urwl

Tlrt RoJerot Bank

•f 1.m.

KopurJ.

700 SUPREME COURT REPORTS (1962] SUPP.

the Resorvo Bank and the Reserve Bank shall, after taking into account. the principle of sound banking and other circumstances furnish to tho authority a certificate, Mtating th>J.t tbo authority shall not take into account any amount as such reserve and such certificate shall be final. All that this case laid down was that such a provisi"On balanced t.he interests of the parties and the delicate fabric of the credit structure of the country. RC8ides that provision relates to production and inspection of documents and relates to what facts can be taken into consideration by an Industrial Tribunal or whether a eertifir.at.e by the bank is proof of a particular fact or not. Again what is applicable to a quasijudioial authority like an Industrial Tribunal adjudicating upon industrial disputes seeking to do .

socil justice may be inapplicable to Courts of law adjudicating upon the rights of a citizen to carry

on his trade and avocation or not.

Next case cited was Sajjan Rank v. Reserve Bank (1).

That was a case whero the validity of s. 22 of the Banking Compani11s Act was chall('nged on the ground of Art. 19( I) of the Constitution and it was held not to be 11/tra m'.res on the ground that power of licensing is not vested with a mere officer of the bank and the standard for exercise of power ha8

been laid down in the section itself and the power granted to the Reserve Bank is not an arbitrary one.

The vital question for decision is whether a law which requires th6 High Court to ordnr winding up because the Reserve Rank is of th" opinion that a banking company should be wound up is constitutional.

In other words can a st'.1tute which takes away the power of tho Court to proceed in a normal judicial manner t.o determine a question submitt<.>d to it for its deeision on tho

(I} [1959] 2 M L . .I. 455.

3 s.o.R.

SUPREME COURT REPORTS 7oi

materials proved before it anrl requires it to decide it merely in accordance with the subjective satisfaction of one party to the dispute and without giving the other party the right to be heard at any stage of the proceeding 11-nd prove its defence be called a reasonable restriction under Art. 19( 1 )(f) and (g) of the Constitution. Will the law which excludes the . application of the judicial process, and compels the Court to merely carry out the behests of one of the :r; iarties by giving effect to that party's subjective satisfaction and thus to abdicate its judgment to the opii:J.ion of a suitor be valid. Dealing with emergence of judicial power Griffith, C. J., in Waterside Workers' Federation of Australia v. J. W.

Alexander Ltd. (1) said that as soon as man emerged from the savage state and formed settled commu- • nities it became necessary to have rules to regulate conduct for the enforcement of which provision was made and this power vested in some person or authority representing the community. Hence arose law givers and Judges and as civilisation advanced distinction began to be drawn between the diverse functions of the community and these functions were called "the judicial power" as distinguished from the legislative and executive powers.

The lea.rped Chief Justice then defined what "Judicial power" is.

He said : "Without attempting an exhaustive definition of the term "judicial power," it may be said that it includes the power to compel the appearance of person before the tribunal in which it is vested, to adjudicate between adverse parties as to legal claims, rights, and obligations whether their origin, and to order right to be done in the matter." Lord Macnaghten in Lapointe v. L' Association de Bienfaisance et de Retraite de la Police de Montrial (') condemned in the case of persons, other than, judges performing judicial functions,

(1) (1918) 25 C.L.R. 434, 442.

(2) (1906) A.C. 535, 539.

Joseph Kuruvilla

Vellukunnel

v. 'The R eseT'!Je Bank of

lnriia

Kapur J.

J ostph Kuruvilla

Vrllukwmtl

The Rtstrvt Bonk of India

Kapur J.

'702 SUPRE~IE COURT REPORTs [1962] SUP!'.

following a procedure "contrary to t.he rules of the society and , iiwv(' all contrary "to the clcmenta.ry principles of justices,"

The importance of tlw judicial proCl'AlB was emphasised bv Patanjali SaRtri,.C. , J. in Rmn Pra.m<l Narain 8ahi v. The Stat.e of Bihar (I), a case

where th<' dispute was between tho i:ltate of Hihar and a private individual about the settlement of lands belonging to Rottiah Raj :

"This is purely a dispute between -private parties <md a matter for determination by duly constituted courts to which is entrusted, in every free and civilistid society, the important function of adjudicating on disputed legal rights after observing the well established procedural safeguards wh icb include the rights to be heard, the right to produce witness and so forth. This is the protection which the law guarantees equally to all pcrsons, and our Constitutiou prohibits by Article 14 every State from denying such protection to anyone." No doubt there the question was raised uncler Art. 14 ; but it iF the importance of the judicial process in disputns between the State and a private individual that waH emphasised. At p. 1133 the learned Chief Justiel' point.ed out the dangers inherent in special enaetmcntH in a syst<m of Government by political parties depriving particular named persons of their liberty or property.

Ia Jfahanl Sri .fagannalh Ramanuj Das v. 'l'he Stat.e of Ori., sa ('j, objection was taken to certain provisions in the Orissa aindu Religious Endowments Aet which related to the framing of a sch<, me.

Under those provisions a scheme could be settled to ensure due administration of the endowed properties but the objection

(l) ~1955] S.C.R. 1129, 1134.

(2) [1954] s.c.R. 1046, 1052.

3 S.C.R.

SUPREME COURT REPoRTS fog

was .that the Act provided for the framing of a scheme not by the Civil Courts nor under provisionu of the Civil Procedure Code but by a Commissioner who was merely an administrative officer. There was no provision for appeal against his order.

Mukherjea, J. (as he then was), said at p. 105:! as follows :

"We think tl).at the settling of .a scheme in regard to a religious institution by an executive officer without intervention of any judicial tribunal amounts to an unreasonable restriction upon the right of property of the superior of the religious institution which is blended with his office.

Sections 38 and 39 of Act must, therefore, be held to be invalid." ' See also 'l'he Commissioner of Hindu Religious Endowments v. SriLakshmindra ('). In Sri Sadasib

Prakash Brahmachari

v. 'l'he State of Orissa (2) which was a decision in regard to the same Act after its amendment after ss. :18 and 39 had been declared to unconstitutional. Bv the amendment although the scheme was to be prepared by the Commissioner a right of appeal direct to the High Court was given against the determination of the Commissioner settling the scheme.· It was held that although from the litigant's point of view an appeal to the High Court from the Commissioner's order is not the same as an independent right of suit and an appeal to the higher court but in order . to judge whether the operation of the provision was or was not an unreasonable restriction what had to be seen was whether the person affected got a reasonable chance of presenting his entire case before the original tribunal which has to determine judicially the question raised and whether he . has a right to regular appeal to the ordinary con

stitution court or courts to correct the errors if any of the tribunal of first instance. It was also

{I) [1954] S.C.R. 1005, 1037.

(2) [I956J s.c.R. 43.

Joseph 'K u1uvilla

Vellukunuel

The Rt$etr.; e Bunk of

india

KapurJ.

I os.ph K ""'vii la

V1u.bnnel •.

TJ,. R.,.... Bank of llldh

Kopur J.

704 SUPREME COURT REPORTs (1962] sUPP.

emphasised in that case that the Commissioner had to be a member of the judicial service and the enquiry before the Commissioner was assimilated to and was governed by the provisions relating to the trial of suits by enjoining that as far as it might be it was to be in accordance with the provisions of the Code of Civil Procedure relating to trial of

suits. The framing of a scheme in th\11 manner was held not to be an unreasonable restriction on the rights of the Mahant under Art. 19(l)(f). It is important to notico that there the right of appeal was in very wide and general terms both on facts and on law and it could relate not merely to the merits of the scheme but also to all basic matters the determination of which was implicit in the very framing of the scheme.

'fhe importance of the judicial power was pointed out by the Priv:v Council in Attorne:y-General, for Austral, ia v. The Queen and the Boilermakers'

Society of Australia (1) where it was held that the function of an industrial arbitrator is completely outside the realms of judicial power and is of a different order. At p. 315 Viscount Simonds observed as follows : -

"On the other hand, in a federal system the absolute independence of the judiciary is tho bulwark of the constitution againRt encroachment whether by the legislature or by tho executive. To vest in the same body executive and judicial power is to remove a vital constitutional safeguard".

A great deal of emphasis was la.id by the learned Attorney-General on the fact that tho Reserve Bank is a body of expert bankerij which could more appropl'iately determine as to when the continuance of a banking company is prejudicial to the interests o

(1) (1957) A.C. 288.

3 S.C.R. strPREM:E oouRT REPoR±s 705

the depositors than a judicial tri~11nal., 1This .. argument is in our opinion fallacious because the liquidation of banking companies in this country as of any other company is a judicial function and therefore within the jurisdiction of Courts and it has never been seriously suggested that the Courts have found or will in future find any difficulty in adjudicating on any technical matter dealing with the peculiar nature of banking companies. It cannot with any justification be argued that in dealing with such matters the exercise of jurisdiction by Courts is less desirable than any other matters which are litigated before them. Indeed it would be a negation of the rule of law if the citizen were to be denied to have his rights adjudicated by an independent tribunal like a Court of law and it will not subserve the interests of the Rule of Law in a free democratic society, if adjudication of the question of the solvency of banking houses was left to the subjective opinion of an executive body like the Reserve Bank even though it may be expert in banking.

The following observations of Lord Morton of Henryton iu Baldwin & Francis LUl. v. Patents

Appeal Trilninal (') which was a case relating to patents are very relevant :-

"It would, indeed, be regrettable in pre sent times, when certiorari lies to so many tribunals dealing with scientific matters, if the courts were precluded from considering whether there was an errors of law on the face of the record because they did not know the meaning of certain technical terms." In an American case Ohio Valley Water Company v.

Ben Avon Borough ('), it was held that withholding from courts power to determine question of confiscation according to their own independent judgment must be deemed to dflny due process of law.

(1) [1959] A.C 663, 679. (2)

(1920) 253 U.S. 287, 64 L Ed. 908. ·

Joseph Kuruvilla

Vellukunntl

The ReserlJt Bank

of lndia

KopurJ.

196Z

Joseph Kul4uiJla

Vellukunrul

Tire ll-J1ru< Bank

of !Mia

Kapiu J.

706 SUPRE.\fE COURT REPORTS [1962J SUPP.

In Halsbury'e Laws of England, Vol. 7, (Simonds Edition), Rt p. 198 it has been stated that it is the right of a subject to have any dispute affec ting him brought before a judicial tribunal and tritd

in accordance with the principles of natural justice and that no party ought to be condemned unheard or to have a decision given against him unless he has been given a reasonable opportunity of putting forward his <:asc.

It was further submitted by the appellant that the Hescrve Bank is entirely an executive body, and therefore a mandatory provision like s. 38\1) and 38(:l) ( b )(iii) practically leaves the question of liquidation of banking companies in the hands of the Executive.

By s. 7 of the Reserve Bank Act the Reserve Bank is required to act according to tho orders of the Govt'rnment. The directors of the Reserve Bank, according to s. 8 are all nominated by the Government. Under s. 38(2) the Reserve Bank is enjoined to apply for the liquidation of a bank if it is so directed by the Central Gu\ernment and therefore any opinion formed by the Reserve Bank in regard to the insolvency or otherwise of <' bank must necel!Barily be the determination of an important branch of the Executive and when s.:~8(1) requires the court to order the winding up of a banking company if an application in that behalf is made by the Heserve Bank then it is the substitution of executive power in place of judicial determination and judicial decision is one of the main features of the rule of law. To quot-e from Stephen's Commentaries on the Laws of England, VuL III, p. 565:

"The importance of the judicial element in our Constitution can hardly be exaggerated, for it rests with the Courts to ensure the conformity of Government with law ................. .

The 'Rulo of Law' which Dicey held to be a leading principle of our Constitution, does not

3 S.C.R.


involve the decision of every dispute by Courts of law.

But it does imply that all authorities in the State act under the eye of the Courts, and are liable to have the legality of their conduct inquired into." , What thf'n is the position in the present case. It is claimed on behalf of the Reserve Bank that the position of the Palai Bank was very precarious and that its assets were not sufficient for the purpose . of the payment to its depositors in full or to me et its

liabiliti0 s. n was also alleged that on several occasions directions had been given to the Palai Bank to conduct its affairs in the manner required by the Reserve Bank and that many opportunities had been given to it to give its explanation as to the defects and irregularities in its working and to carry out the directions of the Reserve Bank and it had failed to comply with them. The a!fegation that the bank was iu a precarious position, unable to meet its demands and it had no liquid assets to pay off its depositors, has been challenged by the appellant. The High Court would have adjudicated upon that question if it had been competent to do into it.

That is exactly what is required in a judicial determination and that is what the Palai Bank, has been deprived of and it is that which affects the constitutionality of the impugned statute. The position under s. 38 of the Banking Companies Act is that if the Reserve Bank is of the opinion that the continuation of a banking company is deterimental to the interests of the depositors and it makes an application for winding up, the Court is bound to order winding up irrespective of whether the banking company has or has not a good defence. Therefore the Court has to put its judicial seal on the opinion of another which is absolute negation of the exercise of the judicial process. It was argued that the Reserve Bank, before it takes action, inspects, gives instructions, takes explanations and hears the

b&Bking company but it is not bound to .do so.

19a2

Joseph f(uruvilla

Ve/lukunnel

The Re.re1 ve Bank oj 1 ndia

Kapur Jr

116~

J 1s1ph Ir w1.1uilla

Vtlh,..;,,,, I

y, The RUero1 Rank

•f India

KQ/#WJ.

7os SUPREME COURT REPOH.1~ (1962] SUPP.

The vice of the impugned provision lies in (a) the power vested in the Reserve Bank to apply to the High Court for an order winding up a bank exercisable solely on its subjective satisfaction as to the existence of conditions prescrib(ld by s. 38, and

(b) th~ obligation imposed by law upon the High Court to make the order of winding up without at any time enquiring whether the conditions on which the application is founded do in truth exist. In adjudging the reas.:inableness of the restriotion impoed by a statute tho Court has to consider its purpose, tlte ovil it intends to remedy and it tries to strike a

balanco between tho interest of tho aggrieved citizen and the larger public interest sought to be served by the sta tutc ; the Court in each casn considers whether the restriction imposed is appropriate, fair and roasonable. The Court will not uphold a restriction whicb. is not necessary for achieving tho purpose of ihe statute or is a arbitrary.

Are tho circumstances 80 compelling in the present ease that w1less the provision requiring a Court to order winding up of a banking company because the

leservo Bank feels Aa.tisfied that it should be wound up to protect the interests of tho depositors is up held the interests of the public cannot be safeguar. dcd ? In considering this question it may be legiti mate to enquire whether the High Court which normally exercises jurisdiction in the matter of ordering winding up of companies is incompetent or its proce. dure inadoquate to examine the charges againBt a banking company. The credit of a banking institution is undoubtedly very sensitive. It thrives upon tho confidence of thl.'I public in tho honcot.y of its management, and its reputation of solvency. There is however nothing peculiar in the business of a banking company that it must be ordered to be wound up on the subjoctivo satisfaction of the Reserve Bank.

The Reserve Bank is undoubtedly an expert body with vast facilities for making enquiries into

3 S.C.R.

SUPREME COuRT'REPORTS 709 ' the aft'airs of banking companiAs in India. But on that account it cannot be presumed that the view of the Reserve Bank that any bankinig institution should be liquidated must always be correct. It cannot be said that' the Reserve Bank can never act mistakenly or even negligently. The Reserve .Bank may even be directed by the Central Goveenment for reasons of its own to apply for liquidation of a Bank. Under the Constitution the Courts are the custodians of the fundamental rights of citizens ; but by this extra-ordinary piece of legislation these very custodians are made the instruments of the Reserve Bank for imposing an order which prima facie is destructive of a guaranteed fundamental freedom. Under our Constitution the legislative and executive actions are subject to judicial review within certain well defined limits. But by s. 38(1 )(b) read with cl. (iii) the Court is not only deprived of its Constitutional func.tions but is commanded to lend its aid in defeating a fundamental freedom of banking companies. Theimpugned provision makes the Reserve Bank the complainant and Judge in its own cause ; it authori ses the Reserve Bank on it subjective satisfaction as to the existence of a state of affairs prescribed by the statute even without an enquiry if it deems fit, to demand that the High Court shall order liquidation of a banking company without making any enquiry as to the sufficiency or even the existence of the material on which its satisfaction depends. The provision making a litigant the Judge in his own cause is an absolute negation of the rule of law. It is the foundation of the edifice of our ju, dicial system that no one shall be . condemned unheard, however strong the circumstances against him may appear to be.

He is entitled to be told, if the freedom of citizen is to have any reality, what he has done to merit punishment or penalty, he must be afforded an opportunity to deny the correctness of the chare

Joseph Kw•Villa

VelluA:unnel ·

' .v~ The Reserve Bank

of India ·

KapurJ.

Jo•tph Kuruuil/u

Vdlul:utvul

•• Thi &aert1 Bank

of India

Kapur J.

710 SUPREME COURT REPORTS [1962] SUPP.

and to set up his plea in denial or extenuation, a11d also be afforded an opportunity to persuade the authority imposing penalty or punishment that the appropriate order is not the one proposed against him.

But by a stroke of the legislative pen all thrsc protections which arc th() foundation of the rule of law are destroyed and the satisfaction of the Reserve Bank is marlo conclusive for entering a verdict for determination of the right of a banking company to continue to exist.

In our view it would be a tragedy if by this and similar legislation citizens are to be convicted of offcncrs, penalties are to be imposed upon theni, their property sequestered, and their rights trampled upon without enquiry by the courts by the simple e.xpedient of requiring the courts to lend their aid in imposing their authority an<l thereby creating a judicial facado to what is in truth exercise of purely executive authority. It is a matter of no moment thnt the executive a.uthority invested with the power to call upon the court to lend its nid, is an expert body which performs an important function directly or indirectly in the governance of tho State. Howevn august th(l body so set up may be, a provision of law providing for imposition of restrictions on a citizen's fundamental right pursuant to its subjective satisfaction as to the existnnqe of a state of affairs, and thereby permanently depriving the citizen of his right or property is in our judgment wholly unreasonable.

Tbc plea of constitutionality of a statute infringing a funclamental right cannot be negatived on the asumption that the autocratic power of impoRini; penalty or punishment is entrusted to the executive authority which will exorcise it only in

proper cases and there will bo no ab use of power.

In the larger interest, onr ConRtitution makers have been averse to oonferml of auto cratic power

3 S.C.R. SUPREME COURT REPORTS 711 ·

and have tried to protect the citizen against the exercise of snch power by guaranteeing him the fundamental freedoms and have also provided protection against infringement or those freedoms by legislative or executive action,

We are prepared to assume, though counsel for the Palai Bank very vehemently challenged the truth of the case of the Reserve Bank, that the affairs of the Palai Bank were mismanaged and that there was a mounting run on the bank and it was practically in an insolvent condition. The validity of a statute is not to be judged in the light of the propriety or otherwise of executivjl 1

action, or its beneficient effects, in a given case':'"'.

The in validity of this statute arises because of the exclusion of any opportunity of judicial investigation into the fairness, propriety and rearnnableness of executive action involving deprivation of a fundamental rights. It is unnecessary to consider the steps which it is claimed the Reserve Bank had taken from time to time to obtain information and to give advice and direction and also the 1 allegation that the application to wind up was submitted because the condition of the Bank was deteriorating as each day passed. These are it must be observed, matters in dispute. Normally, it is the function of the judicial power to investigate whether a banking company should continue to function or should be liquidated. By the im

pugned provision the exercise of that judicial power is excluded. That exclusion is, in our opinion, not based on any inappropriateness of exercise of . the judicial power, or existence of other compelling circumstances in the public interest, and is invalid because the statute, examined in the light of its repercussion on the fundamental right of the citizen is unreasonable.

As we have shown above, under t.he Constitqtion the coqrts are t4e bqlwark.for the protection

196!

Joseph Kuruvilla

V.IMunnel

•• The 'Reserve Ban~

of India

KapurJ,

J96't'

J ,.,, ii /f 1118"ill•

1'11/.t-1

•• The &sm>l'.lllM

•f Intli<i

K•~-,,; J.

712 SUPREME COURT REPORTS [1962) SUPP.

of tho right of the citizens and they are a check on the vagaries, negligence and mistakes of the executive or on the high.handedness of ono party before it a!!'ainst another. This Court has emphasised that the deprivation of the right to resort to court is an unreasonable restriction. It is true that in the present 0ase an appoal to this Court has not been taken away hut what is left is a wholly ineffective right of appeal because if tho law is constitution then all that a court can do is to act according to the opinion of tho Reserve Bank and abdicate its judicial function in favour of the opinion of an executive body.

We are therefore of the opinion that s. 38 is an unreasonable restriction on the right of the ' Palai Bank to carry on its business and is therefore wiconstitutional. We need express no opinion on the question of hostile discrimination by the adoption of the proccduro prescribed but the statute, if it be found unreasonable, is liable to be declared invalid. For those reasons the appeal must be allowed and tho order of the High Court set aside.

BY CouRT-In accordance with the opinion of the majority, the appeal and the writ petition fail and are dismissed with costs, one set only. '

Appeal and petition dism1$sed.