2015 (1) TMI 158 - GUJARAT HIGH COURT

Legality and validity of a Master Circular - Legality and validity of a Master Circular dated 2nd July 2012 issued by the Reserve Bank of India in respect of 'willful defaulter' - notices were issued by the respective banks, calling upon the petitioners to show-cause as to why they should not be declared as willful defaulters in terms of the Reserve Bank of India's Master Circular - petitioners availed of a loan facility – Bank noticed that the loan account of the petitioners was a Non-Performing Asset (NPA) since 30th June 2012 with the outstanding of ₹ 1027 lac (as on the date of the NPA) including the interest at the applicable rate – whether the petitioners are entitled to any of the reliefs as prayed for in their petitions – Held that:- A statute can be invalidated or held unconstitutional, if it is ultra vires the Patent Act, if it is contrary to the statutory provisions other than those contained in the Parent Act, if law making power has been exercised in bad faith, if it is not reasonable and it goes against the legislative policy; and if it does not fulfill the object and purpose of the enabling Act - while examining the constitutionality of a statute it must be assumed that the legislature understands and appreciates the needs of the people and the laws it enacts are directed to problems which are made manifest by experience and that the elected representatives assembled in a legislature enact laws which they consider to be reasonable for the purpose for which they are enacted - There is a presumption in favour of constitutionality and a law will not be declared unconstitutional unless the case is so clear as to be free from doubt - A statute should not be declared unconstitutional merely because in the opinion of the Court it violates one or more of the principles of liberty, of the spirit of the Constitution, unless such principles and that spirit are found in the terms of the Constitution.

Power of the Reserve Bank of India to issue the Master Circular – Held that:- The failure of one bank can have a disastrous effect on the whole banking system, having the potential of leading to systematic crisis with prejudicial effect on the economy as a whole - the banking sector has been a highly regulated area all over the world - It is beyond dispute that banks, as financial instrumentalities are required to strive to fulfill, not only the object of achieving commercial efficiency, but also to serve the object of public interest. In fact, without serving public interest, no bank can legitimately claim any right to exist. It is inconceivable that a bank, as an instrumentality of, and also being capable of, wielding powerful weapons for transformation of the socioeconomic structure of the society, can act without taking into account the public interest and can act for furtherance of private interests of a limited group of persons.

Whether it will be open for the court to review the decisions which have been taken by a specialised body like the Reserve Bank of India and arrive at different conclusions - Held that:- In Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962 (3) TMI 78 - Supreme Court of India] - the law is well-settled that the Reserve Bank of India, which is described as the supreme bank of the country, is empowered to regulate the banking system and certain regulatory functions have been assigned to it by the provisions of the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 - It is in exercise of such powers that the Reserve Bank of India has thought fit to issue the Master Circular.

Delegated legislation - Scope and power of the Reserve Bank of India to issue the Master Circular in exercise of powers under the delegated legislation – Held that:- If power is conferred to legislate only with respect to certain topics or for certain purposes or in certain circumstances, the limits of the power must not be crossed - the phraseology of the delegating provision becomes relevant - in applying the doctrine, the Court has a three-fold task: first, to determine the meaning of the words used in the Act itself to describe the delegated legislation which the delegate is authorised to make; secondly, to determine the meaning of the subordinate legislation itself, and, finally, to decide whether the subordinate legislation complies with that description - an overall responsibility to find out the well-being of a Banking Company, in improving monetary stability and economic growth as well as keeping in view the interests of depositors, the Reserve Bank of India has to formulate its policy vis-a-vis Banking Companies. 'Banking' as defined in Section 5(b) only gives a grammatical meaning of the transactions of a bank and nothing more - If any management or supervision is to be done over the banking activities of a bank, it will have to be governed by banking policy - The 'banking policy' and 'banking' are not independent but coordinating subjects and both are covered within the supervisory powers of the Reserve Bank of India within the meaning of Section 35A of the Banking Regulation Act - Even otherwise, the directions issued by the Reserve Bank of India are in the larger interest of the public and it being a body of experts in banking, the directions given by it should not be lightly brushed aside.

Statutory status of the Circular – Held that:- The Master Circular has been issued with a particular object - whether a circular issued by a statutory authority would be binding or not, or whether the same has a statutory force or not, would depend upon the nature of the statute - for the said purpose, the intention of the Legislature must be considered – in Sudhir Shantilal Mehta v. C.B.I. [2009 (8) TMI 693 - SUPREME COURT OF INDIA] it has been held that the Reserve Bank of India exercises control over the Banking Companies, the Circular letter was binding on the Banking Companies.

Application of maxim nemo judex in causa sua – Held that:- The authorities disclose that mere appointment of an officer of the corporation does not by itself bring into play the doctrine that 'no man can be a judge in his own cause' - for that doctrine to come into play it must be shown that the officer concerned has a personal bias or a personal interest or has personally acted in the matter concerned and/or has already taken a decision one way or the other which he may be interested in supporting - a mere possibility or likelihood of abuse of power does not make the provision ultra vires or bad in law.

Violation of Article 19(1)(g) of the Constitution of India or not - Imposition of unreasonable restriction - Held that:- All the directors irrespective of their type are brought within the purview of the circular for the purpose of declaring them as willful defaulters - Although in clause (5.2), the Reserve Bank of India has tried to clarify the position as regards the independent and nominee directors, yet a plain reading of clause (5.2) would suggest that even the independent and nominee directors are not spared but it would be within the discretion of the committee of high functionaries headed by the Executive Director to take a decision as regards the role of the independent and nominee directors - all the directors cannot be held liable for the default in repayment of the loan which might be for varied reasons beyond the control of such directors – there was some element of arbitrariness in the policy of the Reserve Bank of India.

A director of a company other than the promoter or a direct borrower of the loan from the bank and could also be a director who has a limited role to play and not directly or indirectly responsible for the company going in a debt cannot be restrained, if he himself on his own, wants to start a business or a new venture, from approaching a bank for financial assistance - apart from a social stigma, it is a direct infringement on the right of such a director to carry on trade or business under Article 19(1)(g) of the Constitution of India - the Master Circular, so far as it is sought to be made applicable to all the directors of the company is arbitrary and unreasonable – there was an element of arbitrariness in such policy decision – to this limited extent, it has been held that the Master Circular is violative of Article 19(1)(g) of the Constitution of India and deserves to be struck down partially.

Except stating that the accounts have been classified as "NPA" and that the unit has defaulted in meeting with its payment/repayment obligation to the bank, no other materials have been disclosed with a view to give an opportunity to the petitioners to meet with the show cause notice - the show cause notice is absolutely vague and contains no factual or other materials – it could not be understood as to on what basis the bank has alleged in the show cause notice that the funds provided by the bank have been siphoned of and the same were used for the purpose other than the project for which the loan was sanctioned - If such are the nature of the allegations, then at least it is expected of the bank to provide some materials so that the petitioners can meet with the same - there is violation of the principles of natural justice - one of the facets of the principles of natural justice is fairness which, we do not find on the part of the bank in the proposed action - since the show cause notice is bereft of basic details and material particulars, the same deserves to be quashed and set-aside.

Thus, summarily, the Reserve Bank of India was within its powers to issue the Master Circular relating to the willful default and willful defaulters as it is empowered to regulate the banking system and certain regulatory functions have been assigned to it by the provisions of the Reserve Bank of India Act, 1934, and the Banking Regulations Act, 1949 - The Master Circular has been issued by the Reserve Bank of India in public interest - Although it has not been stated in so many words to have been issued in public interest and also the source of power, yet if the source of power is traceable, exercise of such power cannot be set-aside merely because the same has not been disclosed - The Master Circular does not suffer from the vice of impermissible delegation of a legislative power - It confirms exactly to the power granted - The Master Circular has the force of law and could be termed as a statutory circular - The application of the maxim "nemo judex in causa sua" on the part of the petitioners on the premise that the bank itself will be a judge in its own cause is completely misplaced - In a given case, if the court finds the action to be tainted with malafide or bias, then the same could always be condemned and set at right - On mere apprehension of misuse of such provision, an otherwise valid statute, should not be struck down or condemned - a mere possibility or likelihood of abuse of power does not make the provision ultra vires or bad in law.

The Master Circular does not impose an unreasonable restriction upon the promoters/entrepreneurs, being violative of the Article 19(1)(g) of the Constitution of India as it has the effect of debarring them from availing of any additional facilities for floating a new venture for a period of five years from the date the name of the willful defaulter is published in the list of "willful defaulters" by the Reserve Bank of India - The Master Circular, so far as it is sought to be made applicable to all the directors of the company, is arbitrary and unreasonable - To this limited extent, part of the Master Circular is to be declared as ultra vires the powers of the Reserve Bank of India and is violative of Article 19(1)(g) of the Constitution of India - The Master Circular seeks to paint all the directors with the same brush - The provisions in the circular shatter the concept of identity of a company being different and distinct from its directors without providing any safeguards - The show cause notice issued to the petitioners of Special Civil Application No.645 of 2014 is held to be bad as it is bereft of the basic details and material particulars - The Standard Chartered Bank although has been included as one of the Scheduled Banks in the Second Schedule to the Reserve Bank of India Act, 1934, yet, being a private bank, is not amenable to the writ jurisdiction of the Court - Merely because a company is carrying on the banking business, it cannot per se become a public authority nor can be considered as discharging public functions – Decided partly in favour of petitioner.