Companies Act Case Law Federal Bank Ltd Vs Sagar Thomas & amp Ors

CASE NO.:
Appeal (civil) 106 of 2001

PETITIONER:
Federal Bank Ltd.

RESPONDENT:
Sagar Thomas & Ors.

DATE OF JUDGMENT: 26/09/2003

BENCH:
Brijesh Kumar & Arun Kumar.

JUDGMENT:
JUDGMENT

Brijesh Kumar, J.

 

The respondent no.1 Sagar Thomas was working as a
Branch Manager in Karunagappally branch of the appellant Bank,
namely, the Federal Bank, having its registered office at Alwaye, Kerala.
He was, however, suspended on 29.5.1982, since a disciplinary enquiry
was ordered into some charges against him for having exceeded his
authority in grant of loans and advances to different parties. The inquiry
officer found him guilty of the charges and ultimately punishment of
dismissal was awarded to the respondent.
The respondent no.1 challenged the order of his dismissal by
filing a writ petition in the High Court. A preliminary objection about
maintainability of writ petition seems to have been taken, in defence by
the Federal Bank, saying that it is a private bank and not a State or its
agency or instrumentality, within the meaning of Article 12 of the
Constitution of India, hence a writ petition under Article 226 of the
Constitution is not maintainable against it. The learned single Judge,
however, found that the Federal Bank performs public duty and observed
thus:
“As per statutes, the Reserve Bank and the Central
Government exercise all pervading functional, fiduciary
and managerial control over the banking industry. Every
banking company is duty bound to carry on banking
business as per the banking policy under stringent control
of the Reserve Bank in the interest of banking system or
in the interest of monetary stability of sound economic
growth, having due regard to the interest of the
depositors. The activities carried on by the bank are vital
to public interest and have potential to affect the socio-
economic development and growth of the nation.
Banking companies are therefore, public institutions,
accepting deposits from public, financial assistance from
the State through its agencies/instrumentalities, for the
purpose of lending or investment, pursuing banking
policy and engaged in matters of high public interest or
performing public functions, ensuring monetary stability,
sound economic growth, equitable allocation of various
funds to efficient use, for the promotion and growth of
economy and welfare of the State. The first respondent
is, thus, performing a public duty and a positive
obligation towards its employees and customers exists.
Therefore, it is amenable to writ jurisdiction.”

Ultimately the order passed by the learned single Judge is :
“….In the light of the above decisions of the Apex Court,
I can very well find that the Federal Bank Ltd., is
performing public duty and as such it comes under the
definition of ‘other authority’ within the meaning of
Article 12 of the Constitution of India and as such the
writ petition is maintainable before this Court.”

Aggrieved by the aforesaid judgment of the learned single Judge, the
appellant preferred a writ appeal but referring to a decision of this Court
in U.P.State Co-operative Land Development Bank Ltd. vs. Chandra
Bhan Dubey & Ors. , the Division Bench, observed that in an identical
fact situation it was held that writ application would be maintainable,
minor distinctions on facts, here and there, would not make the aforesaid
decision inapplicable to scheduled banks. With such observations the
appeal was dismissed providing that the learned single Judge shall decide
writ petition on merits. The Federal Bank Ltd. has preferred this appeal,
against the aforesaid judgment of the High Court.
Learned senior counsel appearing for the appellant, so as to
indicate the structure of the appellant, submits that the Federal Bank Ltd.
is a ‘company’ incorporated under the Indian Companies Act, 1913, now
replaced by the Companies Act, 1956. Its activities are regulated by the
provisions of the Banking Regulation Act, 1949. The entire shareholding
of the company is held by private individuals and entities. The finances
of the banks are raised by its own resources and efforts, and the profits of
the bank are utilized by the bank for its own purposes. It does not
perform any sovereign function nor does it exercise any authority over a
third person. The nature of the activity of the bank is that of a
commercial undertaking which receives deposits from the individuals and
advances loans and performs other ancillary monetary transactions. The
management of the bank is in the hands of the Board of Directors. There
are 10 Directors, out of which 7 are selected by the General Body of the
shareholders. Two members are co-opted by the Board of Directors and
one of them is nominated by the Reserve Bank of India. The Board of
Directors exercise the powers of superintendence and control over the
bank. The bank is, therefore, merely a private limited company; it is
neither a ‘State’ nor any ‘authority’ within the meaning of Article 12 of
the Constitution nor it is amenable to writ jurisdiction of the High Court.
It is also the case of the appellant bank that services of an employee or an
officer of a private body, cannot be imposed or thrust upon it nor a relief
of reinstatement can be granted. In this connection, the appellant has
referred to the reliefs prayed for in the writ petition, which are as follows:
“i) a writ of Certiorari or any other appropriate writ,
order or direction quashing Exhibit P3 Enquiry
Report and P6 and P7 orders of the disciplinary
authority and the Board of Directors as illegal and
unsustainable in law;

ii) a writ of Mandamus or any other appropriate writ,
order or direction commanding the respondents to
reinstate the petitioner with all wages and
increments in the salary applicable to him as if he
had continued in service from the date of his
suspension;

iii) any other appropriate writ, order or direction as
this Hon’ble Court may deem fit and necessary on
the facts and in the circumstances of the case and
allow this petition with all costs.”

In the light of the prayer made for issue of a writ of certiorari for
quashing of inquiry report and the order of punishment and further for
issue of a writ of mandamus or any other appropriate writ or direction for
reinstatement of the petitioner with all wages and increments etc. as if,
he had been continued in service, a plea in reply has been raised by the
appellant that it being a private body incorporated under the Companies
Act, it is not amenable to writ jurisdiction of the High Court. It is in the
above background that the learned Single Judge considered the matter
and held that the Federal Bank Limited is performing public duty,
as such it is covered under the expression of ‘other authority’, within the
meaning of Article 12 of the Constitution, hence the writ petition is
maintainable before the High Court.
The question thus, which falls for consideration is as to whether
the appellant bank is a private body or falls within the definition of the
State or local or other authorities under the control of the Government.
A body or organization which is an instrumentality or agency of the State
or a company owned and controlled by the State are all included in the
expression “the State”. If it is found that the petitioner falls within the
later category, there would be no hurdle in holding that such a body or
organization would undoubtedly be amenable to the writ jurisdiction
under Article 226 of the Constitution of India. On the other hand, if it is
found that the appellant is a private body in that event it may have to be
examined whether a writ petition would be maintainable or not and the
extent to which such powers can be exercised.
In support of their respective contentions learned counsels
placed reliance upon certain decisions of this Court as well as on some
decisions of the High Court.
On behalf of the appellant, a decision in the case of Pradeep
Kumar Biswas Vs. Indian Institute of Chemical Biology & Ors ,
decided by a 7 Judges Bench has been referred. The majority judgment
considered a catena of decisions on the point and it has been observed in
paragraph 25 of the judgment : “The tests propounded by Mathew, J. in
Sukhdev Singh were elaborated in Ramana and were reformulated
two years later by a Constitution Bench in Ajay Hasia . What may have
been technically characterized as obiter dicta in Sukhdev Singh (supra)
and Ramana (supra) (since in both cases the “authority” in fact involved
was a statutory corporation), formed the ratio decidendi of Ajay Hasia
(supra)”. Thereafter the court has extracted para 11, at page 737-38 of
the case of Ajay Hasia (supra), as follows : “The concept of
instrumentality or agency of the Government is not limited to a
corporation created by a statute but is equally applicable to a company or
society and in a given case it would have to be decided, on a
consideration of the relevant factors, whether the company or society is
an instrumentality or agency of the Government so as to come within the
meaning of the expression ‘authority’ in Article 12.” It is then observed
that Ramana’s case (supra) noted with approval in Ajay Hasia (supra)
and quoted the tests laid down in the case of Ajay Hasia (supra) at page
737 in para 9. It reads as follows :
“(1) One thing is clear that if the entire share capital of
the corporation is held by Government, it would
go a long way towards indicating that the
corporation is an instrumentality or agency of
Government. (SCC p.507, para 14)

(2) Where the financial assistance of the State is so
much as to meet almost entire expenditure of the
corporation, it would afford some indication of
the corporation being impregnated with
governmental character. (SCC p.508, para 15)

(3) It may also be a relevant factor .. whether the
corporation enjoys monopoly status which is
State-conferred or State-protected (SCC p.508,
para 15)

(4) Existence of deep and pervasive State control
may afford an indication that the corporation is a
State agency or instrumentality. (SCC p.508, para
15)

(5) If the functions of the corporation are of public
importance and closely related to governmental
functions, it would be a relevant factor in
classifying the corporation as an instrumentality
or agency of Government. (SCC p.509, para 16)

(6) ‘Specifically, if a department of Government is
transferred to a corporation, it would be a strong
factor supportive of this inference’ of the
corporation being an instrumentality or agency of
Government. (SCC p.510, para 18)”
This Court has observed in paragraph 31 as follows :
“The tests to determine whether a body falls
within the definition of “State” in Article 12 laid
down in Ramana (supra) with the Constitution
Bench imprimatur in Ajay Hasia (supra) form the
keystone of the subsequent jurisprudential
superstructure judicially crafted on the subject
which is apparent from a chronological
consideration of the authorities cited.”
After considering a number of decisions it has been observed in para 40
of Pradeep Kumar Biswas (supra) as follows :
“The picture that ultimately emerges is that the
tests formulated in Ajay Hasia (supra) are not a
rigid set of principles so that if a body falls within
any one of them it must, ex hypothesi, be
considered to be a State within the meaning of
Article 12. The question in each case would be –
whether in the light of the cumulative facts as
established, the body is financially, functionally
and administratively dominated by or under the
control of the Government. Such control must be
particular to the body in question and must be
pervasive. If this is found then the body is a State
within Article 12. On the other hand, when the
control is merely regulatory whether under statute
or otherwise, it would not serve to make the body a
State.”

The appellant then refers to a decision in Bank of Baroda Ltd.
vs. Jeewan Lal Mehrotra , which is a decision of a three
Judge Bench, wherein it has been laid down that a contract of
service could not be enforced on a private employee. Needless
to say that the case is related to the services of an employee of a
Scheduled bank. Our attention has been particularly drawn to
paragraph 3 of the judgment where it is observed :
“…..The law as settled by this court is that no
declaration to enforce a contract of personal
service will be normally granted. The well
recognized exceptions to this rule are (1) where a
public servant has been dismissed from service in
contravention of Article 311, (2)where re-
instatement is sought of a dismissed worker under
the industrial law by labour or industrial tribunals,
(3) where a statutory body has acted in breach of a
mandatory obligation imposed by statute….”
However, so far the above proposition is concerned, learned
counsel for the respondent submitted that the point relates to the merits of
the matter which is yet to be gone into by the learned Single Judge in
case it is found that a writ petition is maintainable.
U.P.State Co-operative Land Development Bank Ltd.
(supra) has been relied upon by the Division Bench while passing the
impugned order dismissing the appeal. We may examine the position as
involved in that case in some detail. It is registered as a Co-operative
society under the provisions of the U.P.Co-operative Societies Act.
While holding it to be an instrumentality of the State, the Court took note
of the fact that though registered as a co-operative society, it was
constituted under the provisions of the U.P.Co-operative Land
Development Bank Act, 1964. The Managing Director and the Chief
General Manager of the Bank are officials of the State, who are at the
helms of the affairs of the Bank. The service rules for the employees
and officers of the Bank were framed by the State Government in
exercise of powers under Section 30 of the U.P.Co-operative Land
Development Bank Act, 1964. The rules are called the U.P.Co-operative
Land Development Banks Rules, 1971, which lay down the conditions of
services of the employees. The Institutional Service Boards constituted
under Section 122 of the Co-operative Societies Act has also framed
service rules according to which dismissal of an employee can be ordered
only after its approval by the Institutional Service Board. The U.P.State
Co-operative Land Development Bank Ltd. is the only bank constituted
under the provisions of the U.P.Co-operative Land Development Bank
Act and there cannot be any other State level Land Development Bank
for the whole of the State. Apart from the fact that the Bank had
exclusive jurisdiction over the whole of the State of Uttar Pradesh, the
other Land Development Banks could also be made members of the
U.P.State Co-operative Land Development Bank, in any number, as the
Registrar of the Co-operative Societies may deem it necessary. It is
further found that the Registrar of the Co-operative Societies, U.P. is the
trustee for the purpose of securing the fulfillment of the obligations of the
State Land Development Bank to the holders of debentures issued by the
Board of Directors. The Board of Directors are entitled to issue
debentures from time to time with the previous sanction of the State
Government and the trustee, against the unconditional guarantee by the
State Government for the repayment in full of the principal and interest
thereon, or on the security of mortgages, charges or hypothecations etc.
The State Government constitutes a Guarantee Fund under Section 9 of
the Act for the purpose of meeting losses that might accrue on account of
loans advanced by the Land Development Banks. The Guarantee Fund
is maintained by the Finance Department of the State Government. On
the basis of the facts noted above, the Court took the view that the
U.P.State Co-operative Land Development Bank Ltd., though registered
as a Co-operative society, is an instrumentality of the State and its
employees have a statutory protection under the statutory rules.
It is quite apparent that the decision in the case of U.P.State
Co-operative Land Development Bank Ltd. (supra) would in no way
be applicable to the case in hand. The participation and control of the
State in the whole activity of the U.P.Land Development Bank Ltd. is all
pervasive. Its officers head the institution. U.P.Land Development Bank
is constituted as the only State level Bank in the State. Under the
statutory provision there cannot be any other Land Development Bank at
the State level. The government guarantees repayment in the event of
losses suffered by the Bank and with the approval of the State, the Bank
may also issue debentures. To cap it all the service conditions of the
employees are governed by the statutory rules. It is submitted by the
appellant that this case will have no application to the present case and
the same has been wrongly followed and relied upon by the High Court
to dismiss the appeal.
Shri Rajinder Sachar, learned senior counsel appearing for
the respondent, refers to a Constitution Bench decision in All India Bank
Employees’ Association Vs. National Industrial Tribunal & Ors. .

Our attention has been particularly drawn to the observations made at
page 299 of the report wherein it is observed as follows:-
“….If it was not the Reserve Bank of India, the
only other authority 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
country as a whole and of the affairs of each bank
in particular……”.

It has been referred to indicate that the control of the Reserve Bank of
India over all the banks would be as if the control is in place of Finance
Ministry, Government of India.
A reference has then been made to Air India Statutory
Corporation & Ors. Vs. United Labour Union & Ors. , a decision of
a three Judge Bench. It has been held that the industry carried on by Air
India under authority of central government would involve public law
element even though its activity may be commercial in nature. It was
held that the Air India was being run by the Airport Authority of India of
the Central Government and there was element of deep and pervasive
governmental control. Initially it was a statutory authority under the
International Airports Authority of India Act, 1971. Later it was
amalgamated with National Airports Authority and thereafter it is
constituted as a Company under the Companies Act. In that context, it
has been held, if the company is run wholly or partially by the share
capital floated from public exchequer, it gives indication of its control by
the appropriate government. On consideration of a number of decisions
on the point, the Court found the following principles which may be
considered, for coming to a conclusion whether any public element is
involved or not, the paragraph 26 of the decision, reads as under :
“(1) The constitution of the corporation or
instrumentality or agency or corporation
aggregate or corporation sole is not of sole
material relevance to decide whether it is by
or under the control of the appropriate
Government under the Act.

(2) If it is a statutory corporation, it is an
instrumentality or agency of the State. If it
is a company owned wholly or partially by a
share capital, floated from public exchequer,
it gives indicia that it is controlled by or
under the authority of the Appropriate
Government.

(3) In commercial activities carried on by a
corporation established by or under the
control of the appropriate government
having protection under Articles 14 and
19(2), it is an instrumentality or agency of
the State.

(4) The State is a service corporation. It acts
through its instrumentalities, agencies or
persons – natural or juridical.

(5) The governing power, wherever located,
must be subject to the fundamental
constitutional limitations and abide by the
principles laid in the Directive Principles.

(6) The framework of service regulations made
in the appropriate rules or regulations should
be consistent with and subject to the same
public law, principles and limitations.

(7) Though the instrumentality, agency or
person conducts commercial activities
according to business principles and are
separately accountable under their
appropriate bye-laws or Memorandum of
Association, they become the arm of the
Government.

(8) The existence of deep and pervasive State
control depends upon the facts and
circumstances in a given situation and in the
altered situation it is not the sole criterion to
decide whether the agency or
instrumentality or persons is by or under the
control of the appropriate Government.

(9) Functions of an instrumentality, agency or
person are of public importance following
public interest element.

(10) The instrumentality, agency or person must
have an element of authority or ability to
effect the relations with its employees or
public by virtue of power vested in it by law,
Memorandum of Association or bye-laws or
Articles of Association.

(11) The instrumentality, agency or person
renders an element of public service and is
accountable to health and strength of the
workers, men and women, adequate means
of livelihood, the security for payment of
living wages, reasonable conditions of work,
decent standard of life and opportunity to
enjoy full leisure and social and cultural
activities to the workmen.

(12) Every action of the public authority, agency
or instrumentality or the person acting in
public interest or any act that gives rise to
public element should be guided by public
interest in exercise of public power or action
hedged with public element and is open to
challenge. It must meet the test of
reasonableness, fairness and justness.

(13) If the exercise of the power is arbitrary,
unjust and unfair, the public authority,
instrumentality, agency or the person acting
in public interest, though in the field of
private law, is not free to prescribe any
unconstitutional conditions or limitations in
their actions.”

One of the important factors to be considered is, if it is a statutory
corporation, an instrumentality or agency of the State or a company
owned wholly or partially by a share capital floated from public
exchequer, it gives indicia that it is controlled by and under the authority
of the Appropriate Government. We find that it is this factor which
brings in public element. Paragraph 61 of the judgment reads:-
“The legal right of an individual may be founded
upon a contract or a statute or an instrument
having the force of law. For a public law remedy
enforceable under Article 226 of the Constitution,
the action of the authority needs to fall in the realm
of public law – be it a legislative act of the State,
an executive act of the State or an instrumentality
or a person or authority imbued with public law
element. The question requires to be determined in
each case. However, it may not be possible to
generalise the nature of the action which would
come either under public law remedy or private
law field nor is it desirable to give exhaustive list
of such actions…….The distinction between
public law and private law remedy has now
become thin and practically obliterated.”

Shri Sachar then referred to a decision of this Court in Andi
Mukta Sadguru Shree Muktajee Vandas Swami Suvarna Jayanti
Mahotsav Smarak Trust & Ors. Vs. V.R.Rudani & Ors. case. It has
been held in this case that the college in question which was managed by
a trust registered under the Bombay Trusts Act was amenable to writ
jurisdiction and a direction could be issued to the institution to make the
payment of arrears of salary and other benefits to the teacher. It is further
submitted that if a private body discharges a public duty it would be
amenable to the writ jurisdiction. Paragraph 17 of the judgment has been
particularly referred to, which reads as under :
“There, however, the prerogative writ of
mandamus is confined only to public authorities to
compel performance of public duty. The ‘public
authority’ for them mean every body which is
created by statute – and whose powers and duties
are defined by statute. So government departments,
local authorities, police authorities, and statutory
undertakings and corporations, are all ‘public
authorities’. But there is no such limitation for our
High Courts to issue the writ ‘in the nature of
mandamus’. Article 226 confers wide powers on
the High Courts to issue writs in the nature of
prerogative writs. This is a striking departure from
the English Law. Under Article 226, writs can be
issued to “any person or authority”. It can be
issued “for the enforcement of any of the
fundamental rights and for any other purpose”.

Shri Sachar has also stressed upon the observation made in the later part
of para 19 and para 20 where it has been observed:
“…..Any attempt to equate the scope of the power
of the High Court under Article 226 of the
Constitution with that of the English courts to issue
prerogative writs is to introduce the unnecessary
procedural restrictions grown over the years in a
comparatively small country like England with a
unitary form of government into a vast country like
India functioning under a federal structure…..”

Para 20
“….The words “any person or authority” used in
Article 226 are, therefore, not to be confined only
to statutory authorities and instrumentalities of the
State. They may cover any other person or body
performing public duty. ……What is relevant is
the nature of the duty imposed on the body. The
duty must be judged in the light of positive
obligation owed by the person or authority to the
affected party…..”

While making his submissions in reply, the appellant
referred to paragraph 15 of the above judgment wherein it has been
observed that if the rights are purely of a private character, no mandamus
can be issued. It is further observed that if the management of the
college is purely a private body with no public duty, mandamus would
not lie. But it has been held that the college run by a private trust was
affiliated to the university to which public money is paid as government
aid. It is then observed :
“…Public money paid as government aid plays a
major role in the control, maintenance and working
of educational institutions. The aided institutions
like government institutions discharge public
function by way of imparting education to
students. They are subject to the rules and
regulations of the affiliating University. Their
activities are closely supervised by the University
authorities. Employment in such institutions,
therefore, is not devoid of any public character. So
are the service conditions of the academic staff. ….
The service conditions of the academic staff are,
therefore, not purely of a private character. It has
super-added protection by University decisions
creating a legal right-duty relationship between the
staff and the management. When there is
existence of this relationship, mandamus cannot be
refused to the aggrieved party.”

On this basis, it is submitted in reply that those features by reason of
which it has been held that a writ of mandamus would lie against a
private management, are not present in the case in hand. A reference to
para 12 of the Andi Mukta’s case (supra) has been made, where it has
been held that no writ would issue where dismissal was not in violation
of any statutory provision. No reinstatement could be ordered.
Shri Sachar then refers to Unni Krishnan, J.P. & Ors. Vs.
State of Andhra Pradesh & Ors. a Constitution Bench judgment. In
reference to para 79 it is submitted that educational institutions discharge
public duties irrespective of the fact they receive aid or not. The absence
of aid does not detract from the public nature of the duty. The
submission, therefore, is that even though a body or institution may be a
private body but if the duty that it discharges is that of a public nature, a
writ would lie.
In this connection Life Insurance Corporation of India &
Anr. vs. Consumer Education & Research Centre & Ors . also has
been referred to, which in turn refers to Kumari Shrilekha Vidyarthi
Vs. State of Uttar Pradesh , holding that arbitrariness, even in
contractual obligation of public character is violative of Article 14 of the
Constitution. the Court held that rates of premium must be reasonable
and acceptable. It cannot be unjust and excessive. Thus the
touchstone of test is the reasonableness and non-arbitrariness of the
action even in the contractual matters of the State or its agencies and
instrumentalities.
The appellant in reply also referred to The Praga Tools
Corporation Vs. Shri C.A.Imanual & Ors. , where it was held that a
company registered under the Companies Act is neither statutory
nor any public duty is imposed on it by any statute in respect of which
enforcement would be sought by means of a mandamus. Mandamus lies
to secure the purpose of a public or statutory duty. No mandamus or
order of reinstatement of an office which is essentially of a private
character can be issued. A mandamus can be issued to compel the official
of a society to carry out the terms of the statute under or by which the
society is constituted or governed and also to companies or corporations
to carry out duties placed on them by the statutes authorizing their
undertakings.

Executive Committee of Vaish Degree College, Shamli &
Ors. Vs. Lakshmi Narain & Ors. , was also referred to on the
proposition that contract of personal service cannot ordinarily be
enforced.
From the decisions referred to above, the position that
emerges is that a writ petition under Article 226 of the Constitution of
India may be maintainable against (i) the State (Govt); (ii) Authority; (iii)
a statutory body; (iv) an instrumentality or agency of the State; ( v) a
company which is financed and owned by the State; (vi) a private body
run substantially on State funding; (vii) a private body discharging
public duty or positive obligation of public nature (viii) a person or a
body under liability to discharge any function under any Statute, to
compel it to perform such a statutory function.
Learned senior counsel appearing for the respondent has drawn our
attention to the various provisions of the Reserve Bank of India Act,
1934 (for short ‘the RBI Act’), the Banking Regulation Act, 1941 and the
Industries (Development and Regulation) Act, 1951 so as to emphasise
that there is deep and all pervasive statutory control and the control of the
Central Government over the Scheduled Banks. It is submitted that these
banks discharge functions of public nature and owe the statutory
responsibilities, hence there is an element of public law, involved in the
activities of the Bank. Section 22 of the Banking Regulation Act
provides for Licensing of banking companies. No company can carry on
banking business in India unless it holds a licence issued by the Reserve
Bank subject to such conditions as may be imposed. Before issuing any
licence the Reserve Bank may satisfy itself about the conditions as laid
down under sub-section (3) of Section 22 as to whether the company
fulfills those conditions or not.
The appellant is one of the Scheduled Banks, definition of
which as provided in the Reserve Bank of India Act, has been referred to
which says :
“2(e) scheduled bank” means a bank included in
the Second Schedule;”

Sub-section (6) of Section 42 of the RBI Act has been referred to indicate
the control which is exercised by the Reserve Bank of India on the
banking companies. It reads as under :
“(6) The Bank shall, save as hereinafter provided,
by notification in the Gazette of India, –

(a) direct the inclusion in the Second Schedule of
any bank not already so included which carries on
the business of banking [in India] and which –

(i) has a paid-up capital and reserve of an
aggregate value of not less than five lakhs of
rupees, and

(ii) satisfies the Bank that its affairs are not
being conducted in a manner detrimental to
the interests of its depositors, and

(iii) [is a State co-operative bank or a company]
as defined [section 3 of the Companies Act,
1956 (1 of 1956), or an institution notified
by the Central Government in this behalf] or
a corporation or a company incorporated by
or under any law in force in any
place[outside India];

(b) direct the exclusion from that Schedule of any
scheduled bank, –

(i) the aggregate value of whose paid-up capital
and reserves becomes at any time less than
five lakhs of rupees, or

(ii) which is, in the opinion of the Bank after
making an inspection under section 35 of the
Banking Regulation Act, 1949 (10 of 1949),
conducting its affairs to the detriment of the
interests of its depositors, or

(iii) which goes into liquidation or otherwise
ceases to carry on banking business:
xxx xxx xxx

The Preamble of the RBI Act has also been referred to,
which reads as follows :
“An Act to Constitute a Reserve Bank of India :
Whereas it is expedient to constitute a Reserve
Bank of India to regulate the issue of Bank notes
and the keeping of reserves with a view to securing
monetary stability in [India] and generally to
operate the currency and credit system of the
country to its advantage;
And whereas in the present disorganization
of the monetary systems of the world it is not
possible to determine what will be suitable as a
permanent basis for the Indian monetary system;
But whereas it is expedient to make
temporary provision on the basis of the existing
monetary system, and to leave the question of the
monetary standard best suited to India to be
considered when the international monetary
position has become sufficiently clear and stable to
make it possible to frame permanent measures”.

Section 46-A of the Banking Regulation Act provides as under :-
“46A. Chairman, director, etc., to be public
servants for the purposes of Chapter IX of the
Indian Penal Code.- [Every Chairman who is
appointed on a whole-time basis, managing
director, director, auditor] liquidator, manager and
any other employee of a banking company shall be
deemed to be a public servant for the purposes of
Chapter IX of the Indian Penal Code (45 of 1860).]

A reference is also made to Section 35 of the Banking Regulation Act
which provides for inspection of any banking company and its books of
accounts by the Reserve Bank on the direction issued by the Central
Government. Under sub-section (1A) it is provided that without
prejudice to sub-section (1) it may at any time cause a scrutiny to be
made by any one or more of its officers, of the affairs of any banking
company. The report of the inspection or the scrutiny are to be furnished
to the banking company. Sub-section (4) of Section 35 provides as under:
“(4) The Reserve Bank shall, if it has been directed
by the Central Government to cause an inspection
to be made, and may, in any other case, report to
the Central Government on any inspection [or
scrutiny] 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.”

Section 35-A empowers the Reserve Bank to give directions, which reads
as under :
“35A. Power of the Reserve Bank to give
directions.- (1) Where the Reserve Bank is
satisfied that :-

(a) in the [public interest]; or

[(aa) in the interest of banking policy; or]

(b) to prevent the affairs of any banking
company being conducted in a manner
detrimental to the interests of the depositors
or in a manner prejudicial to the interests of
the 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
directions as it deems fit, and the banking
companies or the banking company, as the case
may be, shall be bound to comply with such
directions.

(2) The Reserve Bank may, on representation
made to it or on its own motion, modify or cancel
any direction issued under sub-section (1), and in
so modifying or cancelling any direction may
impose such conditions as it thinks fit, subject to
which the modification or cancellation shall have
effect.”

Section 36 of the Banking Regulation Act which enumerates further
powers and functions of Reserve Banks has also been referred to. The
relevant part of Section 36 reads as under :
“36. Further powers and functions of Reserve
Banks.- (1)The Reserve Bank may –

(a) caution or prohibit banking companies or any
banking company in particular against entering
into any particular transaction or class of
transactions, and generally give advice to any
banking company;

(b) xxx xxx xxx

(c) xxx xxx xxx

(d) xxx xxx

(i) require the banking company to call a
meeting of its directors for the purpose of
considering any matter relating to or arising
out of the affairs of the banking company; or
require an officer of the banking company to
discuss any such matter with an officer of
the Reserve Bank;

(ii) xxx xxx

(iii) xxx xxx
(iv) appoint one or more of its officers to
observe the manner in which the affairs of
the banking company or of its offices or
branches are being conducted and make a
report thereon;

(v) require the banking company to make,
within such time as may be specified in the
order, such changes in the management as
the Reserve Bank may consider necessary.]

(2) & ( 3 ) xxx xxx”

Section 36AA deals with Power of Reserve Bank to remove managerial
and other persons from office. The relevant part of the provision is
quoted below :
“(1) Where the Reserve bank is satisfied that in the
public interest or for preventing the affairs of a
banking company being conducted in a manner
detrimental to the interests of the depositors or for
securing the proper management of any banking
company it is necessary so to do, the Reserve Bank
may, for reasons to be recorded in writing, by
order, remove from office, with effect from such
date as may be specified in the order, [any
chairman, director,] chief executive officer (by
whatever name called) or other officer or
employee of the banking company.

(2) to (5) xxx xxx

(6) Where an order under sub-section (1) has been
made, the Reserve Bank may, by order in writing,
appoint a suitable person in place of [the chairman
or director] or chief executive officer or other
officer or employee who has been removed from
his office under that sub-section, with effect from
such date as may be specified in the order.

(7) to (8) xxxx xxxx”

Section 36AB of the Banking Regulation Act empowers the Reserve
Bank to appoint additional directors of the banking company in the
interest of the company or its depositors. Sub-section (1) reads as under :
“36AB. Power of Reserve Bank to appoint
additional directors.- (1) If the Reserve Bank is
of [opinion that in the interest of banking policy or
in the public interest or] in the interests of the
banking company or its depositors it is necessary
so to do, it may, from time to time by order in
writing, appoint, with effect from such date as may
be specified in the order, one or more persons to
hold office as additional directors of the banking
company:

xxx xxxx”

Section 36AE has also been referred to which empowers the Central
Government to acquire undertakings of banking companies in the
interests of the depositors, the banking policy or for the better provision
of credit generally or of credit to any particular section of the community
or in any particular area. Lastly, our attention has been drawn to
provisions contained in Section 45 of the Banking Regulation Act which
empowers the Reserve Bank to apply to Central Government for
suspension of business by a banking company and to prepare scheme of
reconstitution of amalgamation of a banking company.
In view of the aforesaid provisions it is submitted that the
control of the Reserve Bank of India and the Central Government is all
pervasive over the banking companies, they can cause an inspection to be
made, can make scrutiny of the working and accounts of the banking
company, can remove the Chairman or appoint additional directors, the
functioning of the banking company can also be suspended, the
undertaking can also be acquired. It is further submitted that the Reserve
Bank of India has been constituted to regulate issue of bank notes and for
keeping reserves with a view to secure and maintain monetary stability in
the country. It is with that end in view that powers have been vested in
the Reserve Bank of India to keep proper check on the working and
functioning of the banking companies as also in the interest of the
depositors and the own interest of the banking company. Such a nature of
control indicates that the Banking Companies discharge functions of
public nature.
As against the submission made on behalf of the respondent
regarding control of the Reserve Bank of India over the banking
companies, the appellant submits that such measures as indicated by
reference to the provisions of the Banking Regulation Act are only
regulatory in nature. Such regulatory control is also exercised over other
companies as well, registered under the Companies Act, 1956. In this
connection, a reference has been made to Section 233A of the Companies
Act which empowers the Central Government to direct special audit of
the companies in certain eventualities. For example as indicated in sub-
clauses (a) to (c) of sub-section (1) of Section 233A, which reads as
under :
“233A. (1) Where the Central Government is of
the opinion –

(a) that the affairs of any company are not
being managed in accordance with sound
business principles of prudent
commercial practices; or

(b) that any company is being managed in a
manner likely to cause serious injury or
damage to the interests of the trade,
industry or business to which it pertains;
or

(c) that the financial position of any
company is such as to endanger its
solvency;………”

The report of the special audit is to be submitted to the Central
Government by the Chartered Accountants deputed for special audit. The
special auditor, in the audit report shall include all the matters required
to be included in an auditor’s report under Section 227 of the Companies
Act and the matters as the Central Government may, also direct to
include. The Central Government is also authorized to direct any
particular person to furnish such information or additional information to
the auditor and failure to do so shall render such person liable to be
punished by imposition of fine. The Central Government, on
consideration of the report is empowered to take such action as provided
under the Act or any other law for the time being in force. Section 235 of
the Companies Act empowers the Central Government to appoint one or
more competent persons as inspectors to investigate the affairs of any
company on the application of the shareholders and submit the report to
the Central Government. Similar power for investigation is also vested
under Section 237 of the Act. The company by a special resolution or
court by an order can declare that affairs of the company ought to be
investigated by an inspector appointed by the Central Government, where
the business of the company is being conducted with intent to defraud its
creditors, members or any other persons or otherwise for fraudulent or
unlawful purpose. Then a reference has been made to Section 250 of the
Companies Act which empowers the Central Government to impose
restriction upon the transfer of shares and debentures of the company.
Any transfer of shares made during the period of the restriction, would
be void under clause (a) of sub-section (2). Such actions are permissible
to be taken in the public interest. Section 255 falls in the Chapter II
pertaining to directors and constitution of Board of Directors which
mandates for retirement of directors in given proportion by rotation.
Section 267 places restrictions on appointment of Managing Directors.
Such persons who are undischarged insolvents or at any time have been
adjudged so or having been convicted by a Court of an offence involving
moral turpitude. So far the financial aspect is concerned, the Central
Government has powers in that regard as well and in that connection our
attention has been drawn to Section 58-A. Sub-sections (1) and (2) of
Section 58-A read as under :
“58 A. (1) The Central Government may, in
consultation with the Reserve Bank of India,
prescribe the limits up to which, the manner in
which and the conditions subject to which deposits
may be invited or accepted by a company either
from the public or from its members.

(2) No company shall invite, or allow any other
person to invite or cause to be invited on its behalf,
any deposit unless –

(a) such deposit is invited or is caused to be invited
in accordance with the rules made under sub-
section (1), and

(b) an advertisement, including therein a statement
showing the financial position of the company,
has been issued by the company in such form
and in such manner as may be prescribed…..”
Under Section 388 B the Central Government is empowered to state a
case and refer to the High Court where in certain circumstances it
considers that any person concerned in conduct and the management of
the affairs of the company is not fit to hold the office of Director or any
other office, to make an inquiry into the case and record its decisions in
that regard. On the basis of the report of the High Court the Central
Government has power to remove such a person as the Director or as the
case may be.
A reference has also been made to certain provisions of
Industries (Development and Regulation) Act, 1951. Section 15
empowers the Central Government to cause investigation to be made into
the affairs of the industrial undertaking in certain eventualities. The same
reads as under :
“15. Power to cause investigation to be made
into scheduled industries or industrial
undertakings.- Where the Central Government is
of the opinion that –

(a) in respect of any scheduled industry or
industrial undertaking or undertakings –

(i) there has been, or is likely to be, a
substantial fall in the volume of production
in respect of any article or class of articles
relatable to that industry or manufactured or
produced in the industrial undertaking or
undertakings as the case may be, for which,
having regard to the economic conditions
prevailing, there is no justification; or

(ii) there has been, or is likely to be, marked
deterioration in the quality of any article or
class of articles relatable to that industry or
manufactured or produced in the industrial
undertaking or undertakings, as the case
may be, which could have been or can be
avoided; or

(iii) there has been or is likely to be a rise in the
price of any article or class of articles
relatable to that industry or manufactured or
produced in the industrial undertaking or
undertakings, as the case may be, for which
there is no justification; or

(iv) it is necessary to take any such action as is
provided in this chapter for the purpose of
conserving any resources of national
importance which are utilized in the industry
or the industrial undertaking or
undertakings, as the case may be; or

(b) any industrial undertaking is being managed in
a manner highly detrimental to the scheduled
industry concerned or to public interest];

the Central Government may make or cause to be
made a full and complete investigation into the
circumstances of the case by such person or body
of persons as it may appoint for the purpose.”

Section 15-A also empowers the Central Government to investigate into
the possibility of running or restarting the industrial undertaking which is
being wound up by or under the supervision of the High Court and to
make an application in that regard to the High Court. Chapter III-A
provides for direct management or control of industrial undertakings by
Central Government in certain cases. Relevant part of Section 18-A,
which falls under Chapter III-A, reads as under :
“18-A. Power of Central Government to assume
management or control of an industrial
undertaking in certain cases – (1) If the Central
Government is of opinion that-

(a) an industrial undertaking to which directions
have been issued in pursuance of Section 16
has failed to comply with such directions, or

(b) an industrial undertaking in respect of which
an investigation has been made under Section
15 (whether or not any directions have been
issued to the undertaking in pursuance of
Section 16), is being managed in a manner
highly detrimental to the scheduled industry
concerned or to public interest.

The Central Government may, by notified order,
authorize any person or body of persons to take
over the management of the whole or any part of
the undertaking or to exercise in respect of the
whole or any part of the undertaking such
functions of control as may be specified in the
order…..”

Section 18-AA empowers the Central Government to take over the
industrial undertaking without investigation in the given circumstances.
In view of the provisions indicated above under the
Companies Act and the Industrial (Development and Regulation) Act, it
is submitted that the nature and the control over the companies is more or
less of the same degree and nature as the control exercised over the
banking companies under the Banking Regulation Act. There is control
and supervision over the functioning and working and the conduct of
business of the companies. A watchful eye is kept over the interest of the
share holders, the interest of the company itself as well as over the
production of company, even managing director can be removed by the
Central Government. It has also the powers, as indicated above, to take
over the management of a company. Such powers are drastic;
nonetheless they remain regulatory in nature in the interest of the
industry, the company, the shareholders and in the general interest since
production of goods of importance is most essential for proper economic
growth and stability of the country.
A company registered under the Companies Act for the
purposes of carrying on any trade or business is a private enterprise to
earn livelihood and to make profits out of such activities. Banking is also
a kind of profession and a commercial activity, the primary motive
behind it can well be said to earn returns and profits. Since time
immemorial, such activities have been carried on by individuals
generally. It is a private affair of the company though case of nationalized
banks stands on a different footing. There may, well be companies, in
which majority of the share capital may be contributed out of the State
funds and in that view of the matter there may be more participation or
dominant participation of the State in managing the affairs of the
company. But in the present case we are concerned with a banking
company which has its own resources to raise its funds without any
contribution or shareholding by the State. It has its own Board of
Directors elected by its shareholders. It works like any other private
company in the banking business having no monopoly status at all.Any
company carrying on banking business with a capital of five lacs will
become a scheduled bank. All the same, banking activity as a whole
carried on by various banks undoubtedly has an impact and effect on the
economy of the country in general. Money of the shareholders and the
depositors is with such companies, carrying on banking activity. The
banks finance the borrowers on any given rate of interest at a particular
time. They advance loans as against securities. Therefore, it is obviously
necessary to have regulatory check over such activities in the interest of
the company itself, the shareholders, the depositors as well as to maintain
the proper financial equilibrium of the national economy. The Banking
companies have not been set up for the purposes of building economy of
the State on the other hand such private companies have been voluntarily
established for their own purposes and interest but their activities are kept
under check so that their activities may not go wayward and harm the
economy in general. A private banking company with all freedom that it
has, has to act in a manner that it may not be in conflict with or against
the fiscal policies of the State and for such purposes, guidelines are
provided by the Reserve Bank so that a proper fiscal discipline, to
conduct its affairs in carrying on its business, is maintained. So as to
ensure adherence to such fiscal discipline, if need be, at times even the
management of the company can be taken over. Nonetheless, as
observed earlier, these are all regulatory measures to keep a check and
provide guideline and not a participatory dominance or control over the
affairs of the company. For other companies in general carrying on other
business activities may be manufacturing, other industries or any
business, such checks are provided under the provisions of the
Companies Act, as indicated earlier. There also, the main consideration
is that the company itself may not sink because of its own
mismanagement or the interest of the shareholders or people generally
may not be jeopardized for that reason. Besides taking care of such
interest as indicated above, there is no other interest of the State, to
control the affairs and management of the private companies. The care
is taken in regard to the industries covered under the Industries
(Development and Regulation) Act, 1951 that their production which is
important for the economy may not go down yet the business activity is
carried on by such companies or corporations which only remains a
private activity of the entrepreneurs/companies.
Such private companies would normally not be amenable to
the writ jurisdiction under Article 226 of the Constitution. But in certain
circumstances a writ may issue to such private bodies or persons as there
may be statutes which need to be complied with by all concerned
including the private companies. For example, there are certain
legislations like the Industrial Disputes Act, the Minimum Wages Act,
the Factories Act or for maintaining proper environment say Air
(Prevention and Control of Pollution) Act, 1981 or Water (Prevention
and Control of Pollution) Act, 1974 etc. or statutes of the like nature
which fasten certain duties and responsibilities statutorily upon such
private bodies which they are bound to comply with. If they violate such
a statutory provision a writ would certainly be issued for compliance of
those provisions. For instance, if a private employer dispense with the
service of its employee in violation of the provisions contained under the
Industrial Disputes Act, in innumerable cases the High Court interfered
and have issued the writ to the private bodies and the companies in that
regard. But the difficulty in issuing a writ may arise where there may not
be any non-compliance or violation of any statutory provision by the
private body. In that event a writ may not be issued at all. Other
remedies, as may be available, may have to be resorted to.
The six factors which have been enumerated in the case of Ajay
Hasia (supra) and approved in the later decisions in the case of Ramana
(supra) and the seven Judges Bench in the case of Pradeep Kumar
Biswas (supra) may be applied to the facts of the present case and see as
to those tests apply to the appellant bank or not. As indicated earlier,
share capital of the appellant bank is not held at all by the government
nor any financial assistance is provided by the State, nothing to say
which may meet almost the entire expenditure of the company. The third
factor is also not answered since the appellant bank does not enjoy any
monopoly status nor it can be said to be an institution having State
protection. So far control over the affairs of the appellant bank is
concerned, they are managed by the Board of Directors elected by its
shareholders. No governmental agency or officer is connected with the
affairs of the appellant bank nor anyone of them is a member of the
Board of Directors. In the normal functioning of the private banking
company there is no participation or interference of the State or its
authorities. The statutes have been framed regulating the financial and
commercial activities so that fiscal equilibrium may be kept maintained
and not get disturbed by the mal-functioning of such companies or
institutions involved in the business of banking. These are regulatory
measures for the purposes of maintaining the healthy economic
atmosphere in the country. Such regulatory measures are provided for
other companies also as well as industries manufacturing goods of
importance. Otherwise these are purely private commercial activities. It
deserves to be noted that it hardly makes any difference that such
supervisory vigilance is kept by the Reserve Bank of India under a
Statute or the Central Government. Even if it was with the Central
Government in place of the Reserve Bank of India it would not have
made any difference, therefore, the argument based on the decision of All
India Bank Employees’ Association (supra) does not advance the case
of the respondent. It is only in case of mal-functioning of the company
that occasion to exercise such powers arises to protect the interest of the
depositors, shareholders or the company itself or to help the company to
be out of the woods. In the times of normal functioning such occasions
do not arise except for routine inspections etc. with a view to see that
things are moved smoothly in keeping with fiscal policies in general.
There are a number of such companies carrying on the
profession of banking. There is nothing which can be said to be close to
the governmental functions. It is an old profession in one form or the
other carried on by individuals or by a group of them. Losses incurred in
the business are theirs as well as the profits. Any business or commercial
activity, may be banking, manufacturing units or related to any other kind
of business generating resources, employment, production and resulting
in circulation of money are no doubt, are such which do have impact on
the economy of the country in general. But such activities cannot be
classified one falling in the category of discharging duties, functions of
public nature. Thus the case does not fall in the fifth category of cases
enumerated in the case of Ajay Hasia (supra). Again we find that the
activity which is carried on by the appellant is not one which may have
been earlier carried on by the government and transferred to the appellant
company. For the sake of argument even if it may be assumed that one
or the other test as provided in the case of Ajay Hasia (supra) may be
attracted that by itself would not be sufficient to hold that it is an agency
of the State or a company carrying on the functions of public nature. In
this connection, observations made in the case of Pradeep Kumar
Biswas (supra) quoted earlier would also be relevant.
We may now consider the two decisions i.e. Andi Mukta
(supra) and the U.P. State Co-operative Land Development Bank
Ltd.(supra)upon which much reliance has been placed on behalf of the
respondents to show that a writ would lie against the appellant company.
So far the decision in the case of U.P. State Co-operative Land
Development Bank Ltd.(supra) is concerned, it stands entirely on a
different footing and we have elaborately discussed it earlier.
The other case which has been heavily relied upon is Andi
Mukta (supra). It is no doubt held that a Mandamus can be issued to any
person or authority performing public duty, owing positive obligation to
the affected party. The writ petition was held to be maintainable since
the teacher whose services were terminated by the institution was
affiliated to the university and was governed by the Ordinances, casting
certain obligations which it owed to that petitioner. But it is not the case
here. Our attention has been drawn by the learned counsel for the
appellant to paragraphs 12, 13 and 21 of the decision (Andi Mukta) to
indicate that even according to this case no writ would lie against the
private body except where it has some obligation to discharge which is
statutory or of public character.
Merely because the Reserve Bank of India lays the banking
policy in the interest of the banking system or in the interest of monetary
stability or sound economic growth having due regard to the interests of
the depositors etc. as provided under Section 5(c)(a) of the Banking
Regulation Act does not mean that the private companies carrying on the
business of or commercial activity of banking, discharge any public
function or public duty. These are all regulatory measures applicable to
those carrying on commercial activity in banking and these companies
are to act according to these provisions failing which certain
consequences follow as indicated in the Act itself. Provision regarding
acquisition of a banking company by the Government, it may be pointed
out that any private property can be acquired by the Government in
public interest. It is now judicially accepted norm that private interest
has to give way to the public interest. If a private property is acquired in
public interest it does not mean that the party whose property is acquired
is performing or discharging any function or duty of public character
though it would be so for acquiring authority.
For the discussion held above, in our view, a private
company carrying on banking business as a scheduled bank, cannot be
termed as an institution or company carrying on any statutory or public
duty. A private body or a person may be amenable to writ jurisdiction
only where it may become necessary to compel such body or association
to enforce any statutory obligations or such obligations of public nature
casting positive obligation upon it. We don’t find such conditions are
fulfilled in respect of a private company carrying on a commercial
activity of banking. Merely regulatory provisions to ensure such activity
carried on by private bodies work within a discipline, do not confer any
such status upon the company nor puts any such obligation upon it which
may be enforced through issue of a writ under Article 226 of the
Constitution. Present is a case of disciplinary action being taken against
its employee by the appellant Bank. Respondent’s service with the bank
stands terminated. The action of the Bank was challenged by the
respondent by filing a writ petition under Article 226 of the Constitution
of India. The respondent is not trying to enforce any statutory duty on
the part of the Bank. That being the position, the appeal deserves to be
allowed.
In the result, the appeal is allowed and the judgment and
order passed by the High Court is set aside and the writ petition is held to
be not maintainable. There will, however, be no order as to costs.
AIR 1999 SC Page 753
(2002) 5 SCC page 111
Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi, (1975) 1 SCC 421
Ramana Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489
Ajay Hasia v. Khalid Mujib Sehravardi, (1981) 1 SCC 722
1970(3) SCC page 677
1962 (3) SCR page 265
1997(9) SCC page 377
1989(2) SCC page 691
10. 1993 (1) SCC page 645
1995(5) SCC page 482
1991(1) SCC page 212
1969 (1) SCC page 585
(1976) 2 SCC 58
1

 

Leave a Comment