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Competency of Parliament to Make Law Qua Regulation and Management of Cooperative Banks vis-À-vis that of the State Legislatures Qua Banking: Need For Deleting Obnoxious Provisions
by Dr Arun Kumar Barthakur*
Cite as : (2003) 7 SCC (Jour) 1
By the Amendment Act, 1968 (Act 56 of 1968) Parliament inserted, inter alia, clause (gg) to Section 2 and Sections 13-A and 13-D to the Deposit Insurance and Credit Guarantee Corporation Act (for short the Insurance Act) conferring wide powers on Reserve Bank for winding up, amalgamation, reconstruction and supersession of the board of a cooperative bank. Section 2(gg) defines an “eligible cooperative bank” and Section 13-A provides that no cooperative bank shall be registered under the Insurance Act unless it is an “eligible cooperative bank”. The peremptory mandate of Section 13-A read with Section 2(gg) of the Insurance Act, therefore, left the States with no alternative but to carry out necessary amendments to the Cooperative Societies Acts of their respective States incorporating therein the provisions of Section 2(gg) of the Insurance Act. For instance, by the Amendment Act, 1969 (Mah Act 54 of 1969) the Maharashtra State Legislature amended the Maharashtra Cooperative Societies Act, 1960 (for short the MCS Act) adding an additional Chapter X-A comprising the new Section 110-A, which is ipsissimis verbis a reproduction of Section 2(gg), with slight modifications.
This article explores whether the enactment of the said provisions by Parliament in the Insurance Act and by the State Legislatures in the Cooperative Societies Acts are within their respective legislative competence under Article 246 of the Constitution. Further in the context of failure or malfunctioning of a number of cooperative banks, it also examines whether the said newly inserted provisions were warranted or merely constitute a piece of overlegislation. It also examines whether Section 110-A of the MCS Act is consistent with the requirement of Article 14 of the Constitution and not discriminatory against the board of a cooperative bank vis-à-vis that of a banking company. It further examines whether the audi alteram partem rule could be read interstitially into Section 100-A of the MCS Act to save it from being constitutionally invalid.
In the light of the settled legal position that the State Legislatures have full legislative authority to pass laws in respect of entries in List II, and subject to legislation by Parliament on matters in List III1, let us examine whether Parliament has the legislative competence to enact law conferring power on Reserve Bank in respect of winding up, reconstruction and supersession of the Board of a cooperative bank. By Section 3 of Act 56 of 1968 Parliament inserted clause (gg) to Section 22 of the Insurance Act.
By Section 7 of the same, Parliament, inter alia, also inserted Sections 13-A and 13-D to the Insurance Act.
The implications of the Entries 38, 43, 45 and 47 in the Union List and Entry 32 in the State List in the Seventh Schedule would be easier to understand on a reference to the principle of reconciliation of legislative entries, which are mutually exclusive of the powers of two different legislatures. In Waverly Jute Mills Co. Ltd. v. Raymon and Co. (India) (P) Ltd.3 the Supreme Court had enunciated this principle.
It would be seen from the broad sweep of the language used in Entry 43 List I, that it is general in character compared to Entry 45 List I and Entry 32 List II, which are specific in character. As such Parliament is competent to legislate with respect to incorporation, regulation and winding up of corporations engaged in the business of banking, in view of Entry 43 List I. But so far as the cooperative societies are concerned, they are taken out of the ambit of Entry 43 List I and put in Entry 32 List II. As such, the State Legislature shall have the exclusive power to legislate with respect to incorporation, regulation4 and winding up cooperative societies. Then again, Entry 32 List II is general in terms when compared to Entry 45 List I which is specific in character. As such, Parliament shall have the exclusive power to legislate with respect to banking qua banking business, and not with respect to incorporation, regulation and winding up of cooperative banks.
It is interesting to note that the rule in Waverly Jute Mills3 was followed by a Division Bench of the Punjab and Haryana High Court in Sant Sadhu Singh v. State of Punjab5 wherein the Court reasoned:
“It is evident that Entry 43 and Entry 45 relate to different heads of legislation. Whereas Entry 45 gives the power to the Central Legislature to legislate qua banking business, Entry 43, on the other hand, gives power to the Central Legislature to legislate regarding corporations. It is immaterial whether those corporations were doing the banking business or not. In other words, Central Legislature is competent to legislate with regard to corporations engaged in the business of banking, in view of Entry 43 List I. But so far as the cooperative societies are concerned, they are taken out of the ambit of Entry 43 and put in Entry 32 List II. The word ‘regulation’ in Entry 43 is of wide import and would include how a cooperative society is to work. In other words, it will include the constitution of a cooperative society and any matter relating to its constitution would naturally be the subject-matter of legislation by the State Legislature.
… it must be held that only business of banking as such falls within the ambit of Entry 45; whereas the incorporation of the corporations and other matters relating to them fall within the ambit of Entry 43. Therefore, the constitution of the societies and their working would have fallen within the ambit of Entry 43 but for the fact that cooperative societies are excluded from its purview. The very fact that in Entry 43, corporations engaged in the business of banking are specifically mentioned, it clearly follows that cooperative societies doing that business were taken out of Entry 43 List I, and deliberately put in Entry 32 List II.”6 (emphasis supplied)
This view was followed by a Division Bench of the Bombay High Court in Nagpur District Central Coop. Bank Ltd. v. Divisional Jt. Registrar, Coop. Societies7. Ex facie the provisions of Section 2(gg) except clause (v) and Sections 13-D and 13-A(1) of the Insurance Act — giving power on Reserve Bank qua winding up, amalgamation and supersession of the board of a cooperative bank — are beyond the legislative competence of Parliament, and hence void. Moreover, these matters in pith and substance do not fall within the legislative field of “insurance” provided in Entry 47 List I, and are also expressly excluded from Entry 43 List I. This view is also fortified by the note of caution expressed by Sikri, C.J. in H.S. Dhillon8 wherein he cautioned that “in case the real effect of a Central Act, whether called a Wealth Tax Act or not, is to impose a tax mentioned in Entry 49 List II, the tax may be had as encroachment upon the domain of the State Legislatures”.9
It would be seen that Section 2(gg) except clause (v) of the Insurance Act clearly invades the civil rights of the Board of Directors of a cooperative bank as, inter alia, it gives to Reserve Bank a drastic power to requisition removal of the elected representatives before the expiry of term and substituting non-elected persons, or otherwise encroaches upon the provincial field, within Entry 32 List II, and therefore it is invalid. By the same token Section 13-D of the Insurance Act is also invalid, as it gives power to Reserve Bank in the matter of winding up of a cooperative bank which exclusively belongs to the provincial field.
In the light of this legal position, let us now discuss the constitutionality of Section 110-A of the MCS Act10.
It would be useful here to refer to the Statement of Objects and Reasons introducing Bill 8 of 1969 for amending the MCS Act in the State Legislature, which in material part reads as follows:
“To secure the benefit of insurance cover to the cooperative banks in this State, the State Government has agreed to accept the proposals made by the Reserve Bank and to make the required amendment in the Maharashtra Cooperative Societies Act, 1960. New Section 110-A proposed to be inserted in this Act is on the lines indicated in Section 2(gg) of the Deposit Insurance Corporation Act.”
At first blush, Section 110-A seems to be within the legislative competence of the State Legislature, inasmuch as these matters ostensibly fall within the ambit of Entry 32 List II. But on a careful reading of Section 110-A, it would not be difficult to see through the veil its true substance and effect. Under clause (i) the Registrar is enjoined to make an order for winding up etc., only with the previous sanction of Reserve Bank. Clause (ii) makes it mandatory on the Registrar to make an order for winding up of a cooperative bank if so required by Reserve Bank in the circumstances referred to in Section 13-D of the Insurance Act. Clause (iii) provides that if so required by Reserve Bank in any of the three circumstances mentioned therein the Registrar shall make an order for the supersession of the committee and the appointment of an administrator therefor for such periods not exceeding five years in the aggregate, as may from time to time be specified by Reserve Bank of India. Therefore, the section perforce reduces the role of the Registrar to that of a servile implementer, a rubber stamp of Reserve Bank’s fiat, in effect denuding him of all real powers in the matters; and there lies the rub. The language of the provisions leaves no room whatsoever to doubt that the Registrar is impotent without the prior and imperative requisition given by Reserve Bank; indeed he has to truckle to its directions. The true intent of the legislation11 is, therefore, to confer actual power on Reserve Bank, not on the Registrar. As such, in pith and substance, Section 110-A of the MCS Act has to be construed to be a law qua “Reserve Bank of India” or “Banking” — fields exclusively assigned to Parliament which are also already occupied by Reserve Bank of India Act, 1934 and the Banking Act competently enacted by Parliament, and therefore it is invalid.
For addressing the issue of desirability of Section 110-A of the MCS Act on the lines of Section 2(gg) of the Insurance Act, it would pay to refer to the relevant provisions of the Banking Act and the MCS Act.
RBI’s power over cooperative banks
It would be presently clear that the Banking Act has enough teeth to enable Reserve Bank to effectively play the role of regulator of cooperative banks qua banks without recourse to Section 110-A of the MCS Act. Section 35 relates to the power and procedure of taking inspection and carrying out scrutiny of the affairs of any cooperative bank and its books and accounts. Sub-section (1) thereof starts with the non obstante clause: “Notwithstanding anything to the contrary contained in any law relating to cooperative societies....” It therefore expressly overrides the provisions, if any, contained in the Cooperative Societies Acts enacted by the State Legislatures in respect of inspection, and scrutiny of the records of cooperative banks. Sub-section (1) empowers Reserve Bank at any time and on being directed so to do by the Central Government to cause an inspection of the books and accounts of any cooperative bank by one or more of its officers. This sub-section expressly casts an obligation on Reserve Bank to supply a copy of its report on such inspection to the cooperative bank. Sub-section (1-A)(a) starts with the non obstante clause “Notwithstanding anything to the contrary contained in any law for the time being in force”, which being in more general terms confers a still wider power on Reserve Bank. Therefore, this provision also overrides any law relating to cooperative societies. Under this sub-section Reserve Bank can at any time cause scrutiny to be made of the affairs of any cooperative bank and its books and accounts, without prejudice to the provisions of sub-section (1). Clause (b) of the sub-section mandates that a copy of the report of the scrutiny shall be furnished to the cooperative bank if any adverse action is contemplated against the cooperative bank on the basis of the scrutiny.
Sub-section (4) empowers the Central Government to direct Reserve Bank to cause an inspection to be made of any cooperative bank, and also provides that Reserve Bank may in any other case report to the Central Government on any inspection or scrutiny made under Section 35. Upon considering the report the Central Government if it is of opinion that the affairs of the cooperative bank are being conducted to the detriment of the interest of its depositors, may after giving a reasonable opportunity to the cooperative bank to make a representation in connection with the report, by order prohibit the cooperative bank from receiving fresh deposits. Clause (b) of sub-section (4), which empowers the Central Government to direct Reserve Bank to apply under Section 38 for the winding up of the banking company under report, has been omitted in relation to cooperative banks. It is because the matter of winding up of a cooperative bank in pith and substance falls in Entry 32 List II. This shows that even the Central Government is not authorized to issue the kind of requisition envisaged under Section 110-A of the MCS Act.
Under Section 35-A Reserve Bank, may, from time to time, issue such directions as it deems fit in the public interest; or in the interest of banking policy; or to prevent the affairs of the banking business of any cooperative bank being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interests of the cooperative bank; or to secure the proper management of the banking business of any cooperative bank generally. It is now settled law that the directions issued by Reserve Bank are of statutory nature and binding on all banks12.
Similarly, under Section 36(1)(a) Reserve Bank can “caution or prohibit” cooperative banks generally or any cooperative bank in particular against entering into any particular transaction or class of transactions. Under clause (d) of Section 36(1) it may depute one or more of its officers to watch the proceedings at any meeting of the Board of Directors of a cooperative bank. An officer so deputed can attend such meeting and offer such advice on such matters for the reorganization and expansion of cooperative credit on such lines. The Reserve Bank may also require such officer to send to it a report of such proceedings. The Reserve Bank can also appoint one or more of its officers to observe the manner in which the affairs of the cooperative bank or its offices or branches are conducted and make a report thereon.
Following the mandate of Article 246(3) of the Constitution, the provisions contained in Part II-A entitled “Control over Management” comprising Sections 36-AA, 36-AB and 36-AC are omitted in relation to cooperative banks. It is notable that Section 36-AA(1) confers powers on Reserve Bank to remove any chairman, director, chief executive officer or any other employee of any banking company. Similarly, Part III of the Banking Act, except sub-sections (1), (2) and (3) of Section 45, are omitted in relation to cooperative banks. Under sub-sections (1), (2) and (3) the Central Government may make an order of moratorium staying the commencement of all actions and proceedings against a cooperative bank for a fixed period of time not exceeding six months. But the provisions relating to reconstitution or amalgamation of banking companies contained in sub-sections (4) through (15) are all consciously omitted in relation to cooperative banks. However, Sections 46 and 47-A arm Reserve Bank with enough power to impose penalty on any officer and the board of a cooperative bank for any wilful default in transaction of business.
The conspectus of the above provisions of the Banking Act shows that Reserve Bank wields pervasive control over the business of cooperative banks qua banks, and as such it is in a position to take any appropriate regulatory and remedial action against an errant cooperative bank on any contingency without recourse to the newly inserted Section 110-A of the MCS Act.
Registrar is not powerless
As to whether or not Section 110-A of the MCS Act is a piece of overlegislation it would pay to explore the provisions of the MCS Act in respect of these matters. Chapter II of the MCS Act, inter alia, contains detailed provisions in respect of amalgamation, division and reorganization of cooperative banks. But under Section 18-A(2) no order shall be passed unless a reasonable opportunity of representation and stating objections is given to the banks or any members, depositors, creditors, employees or other persons concerned.
Chapter VII, comprising Section 72 to Section 80, contains detailed provisions for management of cooperative societies. Under Section 78 the Registrar has power to supersede the board of a cooperative bank, if in his opinion the board, inter alia, makes default, or is negligent in the performance of the duties imposed on it by the MCS Act or the rules, or the bye-laws, or commits any act which is prejudicial to the interest of the bank or its members, or wilfully disobeys directions issued by the Registrar or the State Government. But before making any such order the section enjoins the Registrar to issue a notice to the board giving it an opportunity of stating any objection, if any, within fifteen days of receipt of such notice. The Registrar is also enjoined to consult the federal society to which the cooperative bank is affiliated before issuing such order. Section 79-A also empowers the State Government to give directions to any society in the public interest, or for securing proper implementation of cooperative production and other development programmes approved or undertaken by the Government, or to secure the proper management of the business of the society, or for preventing the affairs of the society being conducted in a manner detrimental to the interests of the members, or of the depositors or the creditors thereof. Sub-section (3) empowers the Registrar by order to remove any member of the committee of the society who is found to be responsible for failure to comply with the directions issued under sub-section (1) by the State Government and declare him to be disqualified to be such member for a period of six years from the date of such order after giving a reasonable opportunity of being heard to the person or persons concerned and consulting the federal society to which the society is affiliated. Therefore, Section 79-A of the MCS Act in its effect appears to be analogous to Sections 35-A and 36-AA (the latter is however not applicable to cooperative banks) of the Banking Act rolled into one.
Chapter VIII of the MCS Act, comprising Section 81 to Section 90, contains detailed provisions for audit, inquiry, inspection and supervision of cooperative banks. Similarly, Chapter X of the MCS Act, comprising Section 102 to Section 110, contains detailed provisions for winding up and liquidation of a cooperative bank. However, all these provisions require compliance of the principles of natural justice.
It would now be useful here to refer to sub-section (4)(a) of Section 35 of the Banking Act, which provides that Reserve Bank may supply a copy of the report on any inspection or scrutiny to the Registrar of Cooperative Societies. It is submitted that sub-section (4)(a) of Section 35 contains a salutary provision under which Reserve Bank may send a report — as distinguished from a requisition — to the Registrar. This report could be used by Reserve Bank as a potent weapon against an errant cooperative bank, wherein nothing could preclude Reserve Bank from apprising the Registrar about the serious lapses and defaults, if any, committed by the bank, on the lines envisaged in any of the clauses of the newly inserted Section 110-A of the MCS Act, leaving it to the Registrar, after considering the report, to take an appropriate remedial action under the relevant provisions of the MCS Act. It is pertinent to note that sub-section (4)(a) does not in any way entrench upon the domain of the State Legislature.
In view of the aforesaid provisions of the Banking Act and the MCS Act, therefore, Section 110-A of the MCS Act was totally unwarranted, misconceived and redundant, as its purposes could be equally achieved by Reserve Bank exercising its power under Section 35(4)(a) of the Banking Act, and by the Registrar under the provisions of the MCS Act existing prior to the amendment. The provision, therefore, stands out as an eloquent example of overlegislation, which is a common malady afflicting Indian law.
A colourable piece of legislation
It would be seen that the three circumstances viz. (1) in the public interest; (2) the affairs of the bank being conducted in a manner detrimental to the interests of the depositors; and (3) for securing the proper management of the bank, occurring in clause (iii) of Section 110-A of the MCS Act are actually borrowed verbatim either from Section 35-A or Section 36-AA of the Banking Act. The legislature performed a cut-and-paste operation in bodily lifting these words out of the Banking Act and grafting them into Section 110-A of the MCS Act. It is a legislation whereby Reserve Bank indirectly got conferred on itself the power to issue requisition for winding up, amalgamation or supersession of the board of a cooperative bank, which otherwise, as we have noticed above, it was powerless to do under the Banking Act. As such, Section 110-A is patently a colourable piece of legislation. This view is fortified by the decision in K.C. Gajapati Narayan Deo v. State of Orissa13.
It is true that while legislating on its legislative field the State Legislatures may incidentally trench upon a field under the Union List not occupied by a Central Act. But Entry 45 List I is a specific field of legislation compared to Entry 32 List II which is general in character. As such, the specific field of legislation covering all conceivable matters with respect to the conduct of business of banks qua banks falls under Entry 45 List I and is occupied by the Banking Act. Therefore, on the principle of “generalia specialibus non derogant” the power to legislate on any matters falling under Entry 45 List I is an independent and separate power which is exercisable only under Entry 45 List I — not as an incident of the power to legislate in respect of the general head of legislation under Entry 32 List II, relating to incorporation, regulation and winding up of cooperative societies14.
It is therefore settled law that so long as a parliamentary legislation strictly relates to the designated fields in the Union List it is of paramount authority, provided it has not trenched upon matters, which in pith and substance fall within the domain of the State Legislatures15. To interpret otherwise would render Entry 32 List II otiose and meaningless. Similarly, any State law entrenching in its pith and substance upon a parliamentary Act would be invalid16. To interpret otherwise would render Entry 45 List I otiose and meaningless. This view is also supported by the decision in R.M.D. Chamarbaugwalla v. Union of India17.
Section 110-A is inconsistent with the Banking Act
The determination by Reserve Bank of the circumstances mentioned under clauses (ii) and (iii) of Section 110-A of the MCS Act, as discussed above, ex hypothesi should be the condition precedent for its issuing any requisition under the said provisions. However, Section 110-A does not provide for the manner of arriving at such satisfaction by Reserve Bank as to these matters. Hence, Reserve Bank’s power in this regard is referable to the provisions of Section 35 of the Banking Act. However, it will be seen that in this context Section 110-A of the MCS Act is clearly inconsistent with or repugnant to or expressly overridden by the provisions of Section 35 of the Banking Act. Firstly, because the non obstante clause occurring in sub-section (1) of Section 35 specifically overrides the provisions of the State Cooperative Societies Acts. Similarly, the non obstante clause occurring in sub-section (1-A)(a) also overrides any law for the time being in force18. Secondly, sub-section (1) of Section 35 makes it obligatory on Reserve Bank to supply a copy of its report on the inspection to the cooperative bank, and sub-section (1-A) makes it obligatory to furnish a report of the scrutiny to the cooperative bank if Reserve Bank contemplates any “adverse action” against such a bank. Thirdly, as discussed above it is only the Central Government, which can take any actually “adverse action” against an errant cooperative bank under Section 35(4), not Reserve Bank. Therefore, if Reserve Bank contemplates any “adverse action” after completing its scrutiny of the affairs of the cooperative bank under sub-section (1-A) of Section 35, it has to perforce send such report to the Central Government. Fourthly, the Central Government is enjoined by sub-section (4) to give a sufficient opportunity of making representation to the errant cooperative bank before taking any adverse action against it. Fifthly, under this sub-section the Central Government is empowered only to prohibit acceptance of deposits by a cooperative bank. Sixthly, none of the provisions of the Banking Regulation Act, applicable to cooperative banks, as amended under Section 56, confers any power on Reserve Bank to issue any order or direction to wind-up or supersede the Board of Directors of a cooperative bank. Therefore, a fortiori, Reserve Bank cannot have any power to make the kind of requisitions contemplated under Section 110-A of the MCS Act.
But Section 110-A confers absolute and untrammelled power on Reserve Bank, sans the entire procedure contained in Section 35 of the Banking Act — despite its overriding effect on Section 110-A as aforesaid. Therefore, Section 110-A of the MCS Act — a State law, which in its true effect and substance is at once a law with respect to Reserve Bank and banking — is ex facie inconsistent with or repugnant to the provisions of the Banking Act, a Central law occupying the field; and as such Section 110-A is null and void. This view is fortified by the decision of the six-Judge Constitution Bench in State of W.B. v. Union of India19.
Therefore, there is no choice but to hold Section 110-A as invalid. To hold otherwise would render the provisions of the Banking Act otiose and meaningless.
Section 110-A is discriminatory
It is long settled law that every executive action leading to civil consequences must answer the test of reasonableness and fair play in action in order to be in conformity with Article 14. But Section 110-A is silent about compliance of natural justice. The supersession of the elected members of the board of a cooperative bank is not a joke, and such a drastic consequence cannot in fairness be visited upon them without observing the principle of audi alteram rule. We have noticed above that Section 36-AA(1) of the Banking Act is not applicable for the cooperative banks. This section confers power on Reserve Bank to remove any chairman, director, chief executive officer or any other employee of any banking company, as defined under the Companies Act, in the selfsame circumstances as those mentioned in clause (iii) of Section 110-A of the MCS Act. But under Section 36AA(1) no such order can be made without giving a reasonable opportunity of representation to the officer concerned. Sub-section (3)(a) also confers a right on the affected person to prefer an appeal to the Central Government against an order of removal within 30 days of such order. In contrast, Section 110-A of the MCS Act, however, does not provide an analogous procedure in case of cooperative banks. Are the directors of a cooperative bank by any standard less equal than the directors of a banking company? It appears to us that such a classification between directors of a banking company and a cooperative bank is not founded on any intelligible differentia, having any rational nexus with the object sought to be achieved, namely, ensuring conduct of the affairs of a bank in public interest etc. This view is supported by the ratio of the decision of the seven-Judge Constitution Bench in Nagpur Improvement Trust v. Vithal Rao20, wherein the Supreme Court ruled that if the existence of two Acts enables the State to give one person different treatment from another equally situated the person who is discriminated against, can claim the protection of Article 14.
Section 110-A confers naked powers on RBI
Indeed, the provisions of Section 110-A of the MCS Act are capable of great mischief as they do not preclude Reserve Bank from straight away superseding the elected board of a cooperative bank, even for extraneous reasons, without first discharging its obligations under the Banking Act, qua regulator of cooperative banks. The word “regulate” suggests to control, check, restrain or influence, and as such it is the bounden duty of Reserve Bank to first exercise its regulatory powers under the provisions of Sections 35-A and 36(1)(a), and clause (d) as amended in relation to cooperative banks and, in consonance with fair play in action, it should sparingly use any draconian powers like that of Section 110-A of the MCS Act — only after exhausting the salutary regulatory powers under the aforesaid provisions of the Banking Act. In fact, Sections 35-A, 36(1)(a) and (d) of the Banking Act confer adequate powers on Reserve Bank to take suitable pre-emptive actions in an emergency to restrain the Board of Directors and protect the public interest.21 But the exercise of power under Section 110-A is not made conditional upon Reserve Bank having already exercised those regulatory powers and upon the bank concerned having failed to make amends despite such actions by Reserve Bank. As a result, in practice Reserve Bank finds it less annoying to resort to supersession of the duly elected committee of a cooperative bank, principally because under Section 110-A it is not required to put the bank on notice of the contemplated adverse action and to give an opportunity of representation to such a bank.
It is presumed in some quarters that since Reserve Bank is an expert body, it is not susceptible to exercising power mala fide22.
In Ram Pyare Chaudhary v. State of U.P.23 a three-Judge Bench of the Supreme Court deprecated the practice of exercising such drastic statutory power of removing elected representatives of a cooperative society by the State Government and directed reinstatement of the elected representatives by removing the Administrator.
The decision in State of Mysore v. Allum Karibasappa24 is another case on the point. In this case, the inspection report of Reserve Bank of India of a district cooperative Central bank referred to many irregularities. Pursuant thereto the State Government published a notification in exercising its power under Sections 54 and 121 of the Mysore Cooperative Societies Act, 1959, reciting that the State had contributed Rs 23.8 lakhs to the share capital of the bank and it was necessary in the public interest to take over the conduct of the business of the bank to safeguard public funds. Thereafter, by another notification published under Section 29 of the said Act the State Government nominated the Board of Directors of the bank with the Deputy Commissioner of the district as the President. The bank challenged the notifications on the grounds that the action of the Government was ultra vires the Act; it was bad in violation of principles of natural justice; and the action was taken because of political rivalry with an evil eye to remove the President from the office. The High Court upheld the first two contentions and set aside the order. Dismissing the appeal by the State, the Supreme Court inter alia observed that the State had not taken recourse to Section 30 of the Act (which is analogous to Section 78 of the MCS Act) to supersede the management and ruled that the notifications suffered from the vice of violation of natural justice, and the committee was removed arbitrarily.
Another decision which supports this view is Chintapalli Agency Taluk Arrack Sales Coop. Society Ltd. v. Secy., Govt. of A.P.25, wherein a threeJudge Bench of the Supreme Court held that even though the appellant had filed some representations in respect of the matter, it would not absolve the Government from giving notice to the appellant to make representation against the claim of the respondents. The Court did not agree with the High Court that this provision could be bypassed by resort to delving into correspondence between the appellant and the Government. The Court ruled thus:
“This minimal requirement can on no account be dispensed with by relying upon the principle of absence of prejudice or imputation of certain knowledge to the party against whom action is sought for.”26
(emphasis supplied)
The question of compliance with natural justice under Section 110-A was raised before the Bombay High Court in a recent case in Ishwardas Premkumar Choradiya v. State of Maharashtra27. In this case the petitioner challenged the order of the Registrar issued under Section 110-A(iii) of the MCS Act superseding the Board of Directors of the Rupee Cooperative Bank without putting the members of the Board on notice of the intended action. In spite of the aforesaid settled legal position, a Single-Judge Bench of the High Court presided over by F.I. Rebello, J. held that once Reserve Bank issues a direction to the Registrar desiring that the Board of Directors be superseded, it is binding on him, and the right to a show-cause notice, or hearing, or fair opportunity from the Registrar before issuing the order is excluded. Referring to a letter written in personal capacity by the Chairman of the Bank to an officer of Reserve Bank the learned Judge held that the petitioners were aware of Reserve Bank contemplating a drastic action in the matter. The learned Judge held that the powers conferred on Reserve Bank under Section 110-A of the MCS Act should not be hindered by reading into it the requirement of a show-cause notice. It is respectfully submitted that in the face of the settled law in this regard the said decision is not good law.
Can Section 110-A be read down?
Before we address this issue it is necessary to explore what was the intent of the legislature that made the law.28 As discussed above, prior to enacting Section 110-A, the statutory position in the MCS Act was this. Section 18-A specifically provided for amalgamation of cooperative banks; Section 78 empowered the Registrar to supersede the Board of Directors; Section 79A empowered the State Government to issue directions to the cooperative bank and the Registrar to remove any director or employee found responsible for not complying with such directions; and Section 102 empowered the Registrar to issue order for winding up the bank in certain circumstances. But the trouble with these provisions was that the power under none of them could be exercised without complying with the principles of natural justice. These provisions are thus animated by the rule of law and fair play in action, which is a part of Article 14 of the Constitution.
In contrast, Section 110-A does not provide for the requirement of audi alteram partem rule. The section is couched in peremptory language as manifested by the clause “if so required by Reserve Bank of India” combined with the clause “an order shall be made” brooking no latitude to the Registrar. The non obstante clause occurring in the section overrides all other provisions of the Act as aforesaid. Moreover, clause (iv) of Section 110-A declares that an order issued under the section shall not be liable to be called in question in any manner. The intention of the legislature is thus more than clear: it was to give an absolute free hand without any limitations whatsoever, that is, a naked arbitrary power on Reserve Bank to wind up a cooperative bank or supersede its board, or amalgamate two or more banks into one without complying with the principles of natural justice. Otherwise, the legislature would not have enacted this provision at all as the said objects could have been equally achieved under the existing provisions of the MCS Act, as aforesaid, albeit subject to compliance of natural justice, as expressly provided therein. This view is fortified by the rule in Attorney-General for Ontario v. Attorney-General for Canada29: “If the text is explicit, the text is conclusive alike in what it directs and what it forbids.” This view is also fortified by the decision of a five-Judge Constitution Bench of the Supreme Court in C.B. Gautam v. Union of India30 wherein the Court reiterated the rule that in order to save a statute from being struck down as arbitrary or unconstitutional it is not permissible to read it down or part of it in such a manner as would fly in the face of the express terms of the statutory provisions.
Moreover, the circumstances under which Reserve Bank is empowered to issue the directions under Section 110-A, are in pith and substance matters relating to “conduct of the business of banks qua banks”, and as such to make the requirement of natural justice any meaningful, it is Reserve Bank which should comply with this rule before issuing any direction under the section. However, such an exercise would require extensive additions and deletions to the provision, which is beyond the jurisdiction of the court, and would also amount to legislation even travelling beyond the legislative competence of the legislatures concerned.
It will be noticed from the unambiguous language used in Section 110-A that the circumstances under which Reserve Bank is empowered to issue requisition to the Registrar under its provisions are entirely left to the absolute discretion of Reserve Bank, as if it is an imperium in imperio, inasmuch as there is no requirement for giving to the bank concerned an opportunity of making a representation against the contemplated action, or meeting the evidences leading to Reserve Bank’s opinion as to the existence of those circumstances. Therefore, it appears that, as if, under this section Reserve Bank could form its opinion as to those circumstances following the obnoxious maxim “sic vollo sic jubeo” — “I will, thus I command, be my will sufficient reason.” The provision is therefore a disingenuous disguise for naked arbitrary action, and in view of the settled law the provision cannot be read down to make it conform to the rule of law and the requirement of Article 14 of the Constitution.
Conclusions
(a) Section 2(gg) except clause (v), Sections 13-A(1) and 13-D of the Insurance Act are in respect of matters, which, in pith and substance, do not pertain to insurance but squarely fall within the ambit of incorporation, regulation and winding up of cooperative societies under Entry 32 List II. These matters are expressly excluded from Entry 43 List I, and as such, as per settled law these provisions are ultra vires the legislative competence of Parliament under Article 246(1) of the Constitution, and hence null and void.
(b) Earlier Parliament had recognized its legislative limitation while enacting Act 23 of 1965 whereby it incorporated Section 56 in the Banking Act amending and omitting many provisions of the said Act in relation to cooperative banks. Following the doctrine of pith and substance Parliament consciously omitted all the provisions of the then extant Act, which pertained to the matters of incorporation, regulation and winding up of cooperative banks.
(c) Section 110-A was inserted in the MCS Act by Maharashtra Act 54 of 1969, at the behest of Reserve Bank, in keeping with the mandate of Section 2(gg) of the Insurance Act. The section is ipsissimis verbis a reproduction of Section 2(gg), with very negligible modifications. The section denudes the Registrar of his powers under the MCS Act by reducing his role to that of a rubber stamp and confers the actual power on Reserve Bank. The section in its object as well as in true effect and substance is a law with respect to Reserve Bank of India and banking.
(d) Moreover, the three circumstances occurring in clause (iii) of Section 110-A of the MCS Act viz. (1) in public interest; (2) the affairs of the bank being conducted in a manner detrimental to the interests of the depositors; and (3) for securing the proper management of the bank, were actually borrowed verbatim either from Section 35-A or Section 36-AA of the Banking Act. In their true nature and character the said matters are relatable to “the conduct of the business of banks qua banks”, squarely falling within the legislative head “Banking” under Entry 45 List I. Therefore, Section 110-A is patently a colourable piece of legislation, inasmuch as by having the State Legislature enact the same in the MCS Act, at its behest, Reserve Bank has indirectly intended to achieve what it was unable to do under the Banking Act. Moreover, the provisions of Section 110-A are also inconsistent with or repugnant to the provisions of the Banking Act. As such, Section 110-A is ultra vires Articles 246(3) and 254(1) of the Constitution and hence invalid.
(e) Section 110-A also makes an invidious classification of banks based on its incorporation. For a banking company incorporated under the Companies Act the provisions of Section 36-AA of the Banking Act apply for removal of its chairman, chief executive officer or any director. This section makes it mandatory to comply with the audi alteram partem rule and also provides for appeal to the Central Government. But for a bank incorporated under the Cooperative Societies Act, Section 110-A of the MCS Act does not require compliance with natural justice and provides for no appeal. Therefore the section is ultra vires Article 14 of the Constitution.
(f) The non obstante clause in Section 110-A overrides all other provisions of the MCS Act. The intention of the legislature in enacting Section 110-A is thus more than clear. It was to give an absolute free hand to Reserve Bank to issue any requisition for the purposes mentioned therein sans the procedure provided under the MCS Act, especially circumventing the requirement of the audi alteram partem rule. Moreover, clause (iv) of Section 110-A declares that an order issued under the section shall not be liable to be called in question in any manner. The provision therefore confers naked arbitrary power on Reserve Bank. Therefore, as per the settled law the provisions of Section 110-A cannot be read down by reading into it the audi alteram partem rule.
(g) The object of Section 110-A of the MCS Act could be equally achieved by Reserve Bank in exercise of its powers under Sections 35-A, 36(1)(a) and (d) of the Banking Act, and by apprising the Registrar of the selfsame circumstances, if any, as grafted to Section 110-A of the MCS Act, in its report under Section 35(4)(a) of the Banking Act, leaving it to the Registrar to take appropriate action under the relevant provisions of the MCS Act. As such, Section 2(gg) except clause (v), Sections 13-A(1) and 13-D of the Insurance Act and Section 110-A of the MCS Act are totally misconceived, unwarranted and redundant. Therefore, these provisions are eloquent examples of overlegislation, which is a common malady afflicting Indian law.
(h) Much of the maladies afflicting the cooperative banks are attributable to the failure of Reserve Bank in timely discharging its regulatory obligations under the Banking Act and of the Registrar under the MCS Act. The existing law without the draconian Section 110-A of the MCS Act is adequate enough to achieve the desired object: it is the regulatory bodies not the law which are to blame for the malfunctioning of many cooperative banks.
The provisions of Section 2(gg) except clause (v), Sections 13-A(1) and 13-D of the Insurance Act and Section 110-A of the MCS Act are ultra vires and are obnoxious to the rule of law. As such, these provisions should not be suffered to continue to blot the statute-books. The lawmakers and the courts alike should therefore take the earliest opportunity to wipe out these provisions from the statute-books.
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(i) an order for the winding up, or an order sanctioning a scheme of compromise or arrangement or of amalgamation or reconstruction, of the bank may be made only with the previous sanction in writing of the Reserve Bank;
(ii) an order for the winding up of the bank shall be made if so required by the Reserve Bank in the circumstances referred to in Section 13-D;
(iii) if so required by the Reserve Bank in the public interest or for preventing the affairs of the bank being conducted in a manner detrimental to the interests of the depositors or for securing the proper management of the bank, an order shall be made for the supersession of the committee of management or other managing body (by whatever name called) of the bank and the appointment of an administrator therefor for such period or periods not exceeding five years in the aggregate as may from time to time be specified by the Reserve Bank;
(iv) an order for the winding up of the bank or an order sanctioning a scheme of compromise or arrangement or of amalgamation or reconstruction or an order for the supersession of the committee of management or other managing body (by whatever name called) of the bank and the appointment of an administrator therefor made with the previous sanction in writing or on the requisition of the Reserve Bank shall not be liable to be called in question in any manner; and
(v) the liquidator or the insured bank or the transferee bank, as the case may be, shall be under an obligation to repay the Corporation in the circumstances, to the extent and in the manner referred to in Section 21;”
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