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TMI Blog1962 (3) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... nown as ,The Central Bank, Ltd."'. when the name was changed. In March 1937, the Palai Bank was included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934). According to the balance sheet of the Palai Bank for the year ending December 31, 1959, the paid-up capital was Rs. 24,89,639.53. The nominal capital of the Palai Bank was Rs. 40 lakhs divided into 1,60,000 equity shares of Rs.25/- The Palai Bank seems to have greatly extended its business as time passed. In 1928, the deposits were a mere Rs. 77,000/-, but by 1960, they had become almost Rs. 10 crores. It had, during the years, become the foremost Bank in Kerala State, and its place was 15th in the whole of India. It had 25 branches in and outside the State of Kerala. When Kerala became a Part B State, the Reserve Bank of India Act was extended to that area, and the Palai Bank came under the supervision of the Reserve Bank, which, in exercise of the powers vested in it by the Banking Companies Act as well as the Reserve Bank of India Act, periodically inspected the Palai Bank. These inspections were made in 1951, July 1953, February March 1956, March 1958 and January- February, 1960. Every time the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd future, in full or conducting its affair in a manner not detrimental to the interests of the depositors, and did not satisfy the requirements of ss. 42(6)(a)(i) and (ii) of the Reserve Bank of India Act. The Reserve Bank at this stage deputed an observer, and issued further directions and threatened to remove the name of the Palai Bank from the Second Schedule to the Reserve Bank of India Act, if the directions were not faithfully and punctually carried out. All this time, the Reserve Bank was requiring the Palai Bank to submit statements and returns In the inspection which was made in March-May, 1958, the position as on February 28, 1958, was found to be even worse. Though the deposits had gone up, the advances had raisen to Rs. 421.56 lakhs, of which Rs. 208.05 lakhs were said to be irrecoverable, and in the opinion of the Reserve Bank, after writing off the paid-up capital, reserves etc. of the value of Rs. 41.17 lakhs, deposits to the extent of Rs. 177.24 lakhs were impaired. More directions in the game key followed, and the Bank was warned that it was conducting its affairs in a way which was detrimental to the interests of the depositors. in the scrutiny in January-Februar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, leaving the others with nothing or next to nothing. The Bank alleges in its affidavits in reply that the run was subsiding, while the Reserve Bank maintains that it was going on unabated. Whether it was abating or continuing, the reputation and security of the Bank had been considerably shaken. The learned Company Judge, in his judgment under appeal, estimated that Rs. 158 lakhs (about one-sixth of the deposits) represented the sudden withdrawals. The Directors of the Palai Bank sent Mr. Sivaraman on August 960, to Bombay for urgent consultations, and Mr. Sivaraman on his return, announced on the 8th that in application for the winding up of the Bank had been made that day, and a provisional Liquidator had been appointed. He accordingly, issued orders to the Branches to stop business and close the doors. The 'Reserve Bank was of the opinion that the Palai Bank was not in a position to pay its depositors in full, and that the continuance of the Bank was prejudicial to the interests of the depositors. The application, as already stated, was made on August 8, 1960. It was heard by Raman Nayar, J. He dispensed with notice under s. 450(2) of the Companies Act before passing the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the section. The appellant contended that enquiries by the Reserve Bank in the past were not thorough; but in the application for winding Up, the Reserve Bank had given specific details of the advances and their realisability. In this connection, we were referred to a reply made by the Reserve Bank in answer to four schemes of compromise between the Bank and its creditors suggested by the Palai Bank. In that reply, the Reserve Bank said that no definite opinion could be expressed on the schemes except "after a detailed examination of the Bank's books of account with a view to assessing the realisability of its assets and the probable pace of recovery of the realisable assets." This, in our opinion, was a proper attitude to take, because by then, the condition of the Bank had materially altered, and all the past data had become out of date. The reply did not show that the Reserve Bank's inspection was not thorough. Next, it was argued that the Reserve Bank's estimate of cash and realisable assets was wrong, if one reads the report of the Provisional Liquidator and the General Manager, dated November 8, 1960. We have already referred in an earlier part of this judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. All this may be true; but it is useless for us to speculate as to what would have happened if the depositors did not take a hand in the affairs by making a run; and the action of the Reserve Bank was precipitated by the exigencies of the situation, which had arisen. Those who made a run for their money, were not going to wait till the Bank acquired sufficient funds to pay them after recovering its advance. Those advances, as conceded, could not so easily be realised as the advance made by a commercial bank on security other than that of land. If this rural bank began to arrange its business like a commercial bank it must necessarily be judged by the same standard, and the affairs of the Palai Bank, in our opinion, had long left behind the rural character, and had emerged into those of a modern commercial bank. What we have said above is sufficient to show that there was not enough material on which the action of the Reserve Bank could strictly be characterised as mala fide. Indeed, the forbearance with which the Reserve Bank acted (and it proved unwise) has completely demonstrated the futility of granting time, and we are not surprised that the answering respondents in the Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess as a banking company. To amplify the first, it is argued that s. 433 of the Companies Act, when an application is made to wind up a company, the High Court has to be satisfied after a fair trial that an order to wind up the company is called for, and the Judge, who is independent of executive control, is completely free to reach a decision after the Company has shown cause, and there is a right of appeal against the decision, if adverse to the company. But under the procedure laid down in s. 38 of the Banking Companies Act, the banking company proceeded against has no opportunity to show cause either before or after the winding up order, the Reserve Bank .records no reasons in writing or communicates them, there is no access to Court and no hearing before the. Court to determine whether the proposed action is justified, and no redress if a mistake were made. Under the exercise of that power, it is said, any banking company can be suppressed by the Reserve Bank or by the Central Government and the Courts are powerless, since the opinion of the Reserve Bank and/or the central Government is not justiciable and there is no appeal against the decision of the Reserve Bank or of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpt action be cause the Reserve Bank already possessed all the necessary information. He contends that the position of the Reserve Bank and its statue as a responsible body make it the proper authority to make such an important decision requiring immediate action and that unless the Reserve Bank could be charged with dishonesty (which is not the case) the action of the Reserve Bank not only cannot be questioned, but should not be open to doubt. According to him, banking companies are in a class by themselves, and special law dealing with their winding up cannot be described as discriminatory. He con- tends that the law is neither discriminatory nor un- reasonable, and that a prior judicial determination of an issue of this kind is not a condition precedent to the making of a winding up order against a batik. He therefore, says that the appeal and the petition should be dismissed. Before we consider the arguments of the two sides in detail, we wish to say a few words about the position of the Reserve Bank in the financial affairs of India and also about its place in the scheme of the law. The Reserve Bank of India was established on April 1, 1935, by the Reserve Bank of India Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Governments to transact their business. In addition to these, the Reserve Bank could require all Banks included in the Second Schedule to the Act to maintain with the Reserve Bank a balance not less then 5 per cent, of their demand liabilities and 2 per cent of their time liabilities. The Reserve Bank also performed the normal functions of a central bank as well as an ordinary bank, though the latter functions are not as detailed as those of in ordinary bank. But the most important function of the Reserve Bank is to regulate the banking system generally. The Reserve Bank has been described as a Bankers' Bank. Under the Reserve Bank of India Act, the scheduled banks maintain certain balances and the Reserve Bank can lend assistance to those banks "as a lender of the last resort". The Reserve Bank has also been given certain advisory and regulatory functions. But its position as a central bank, it acts as an agency for collecting financial information and statistics. It advises Government and of-her banks on financial and banking matters, and for this purpose, it keeps itself informed of the activities and monetary position of scheduled and other banks and inspects the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserve Bank has of the banking structure of the country as a whole and of the affairs of each bank in particular." The position of the Reserve Bank being such as we have stated from the Reserve Bank of India Act, the next thing to enquire is its powers under the Banking Companies Act. The Banking Companies Act, in its present form, is the product of many legislative enactments. The Banks' Liquidation Proceedings Committee (1962) correctly described it as "made up of shreds and patches" We were taken through the entire evolutionary process by the learned Attorney-General; but we do not consider it necessary to trace the various steps. We shall content ourselves with a reference to the salient landmarks. In the Indian Companies Act, 1913, there was no special procedure for banking companies, particularly relating to their winding up. Special provisions were introduced in that Act by the Indian Companies (Amendment) Act, 1936. Part X-A, which was then introduced, merely enacted certain regulatory provisions, but of winding up of banking companies, it ,said nothing. The amendment hardly met the purpose and the Reserve Bank of India framed a draft bill as far back as 1939 from whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court shall appoint the Reserve Bank as the Official Liqui- dator of a banking company on the application of the Reserve Bank in that behalf. The Reserve Bank of India Act was also amended to enable the Reserve Bank to give a loan or loans to a banking company with a first charge on the assets, if wound up. A large number of banking companies had failed during the years, 1947, 1948 and 1949. Between 1926 and 1937, 23 Banks had suspended payment. In 1938 and 1939, 46 Banks failed, from 1940 to 1946, 95 Banks were involved. But, in 1947, 1948 and 1949 there were as many as 123 failures involving outside liabilities of Rs. 82 crores ! The largest number was in Calcutta with 83 Banks. In the winding up proceeding that followed, many unsatisfactory features were noticed. It was noticed that the realisations were insignificant, while the costs were great, and enormous expenditure of time took place. The winding up of any company, be it a banking company or any other, requires an investigation of the affairs, the recovery and realisation of assets and distribution of what is realised. While these matters can,, of course, be carried on without undue hurry, the decision whether there shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Banking Companies Act. When the Banking Companies Act was originally enacted, the main objects were to prescrible minimum capital standards, to prohibits the non- banking companies to accept deposits repayable on demand and to limit dividends payable. But included in the Act was a comprehensive scheme for licensing of banks and a conferral on the Reserve Bank of power to call for periodical returns and balance sheets and to inspect books and accounts of banking companies. The Act also empowered the Central Government to take action against banks conducting their affairs in a mariner detrimental to the interests of the depositors, and provided for a quicker procedure for winding up banking companies. When the Banking Companies Act was passed in 1919, it was explained in the note on cl. 37, which corresponded to s. 38, that the provisions of the Indian Companies Act in respect of liquidation of companies did not seem to be suitable for banking companies, that a bank's business being of an over-the-counter kind, the bank has to meet immediately its liability and a provision for winding up of the banking company when it refuses to meet a lawful demand within a stated time, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserve Bank for an order moratorium, the Reserve Bank has to satisfy- itself and prepare a scheme, which, inter alia, must be in the interests of the depositors. This brief survey of some of the other provisions of the Banking Companies Act, in addition to the general provisions earlier noticed, makes it plain that the legislature considers that consistent with its position as a central bank and more so with its duties and obligations, the Reserve Bank must have a decisive voice in certain matters. It is in this context and setting that the, provisions of ss. 38(1) and (3)(b)(iii) of the Banking Companies Act must be viewed. It must not be overlooked that the legislature, in view of the sad experiences of the past, was anxious to devise a machinery for the supervision, inspection and effective functioning of banking companies in the country. Associated with this was the speedy closure of banking companies, which were harmful to the interests of the depositors. The legislature achieved both these objectives through the Reserve Bank, which, because of its special powers and advantages, was in a position to act promptly and effectively. To aid the Reserve Bank, the Courts were requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid classification, the different procedure cannot be said to be discriminatory, because it is based on differences which are related to the end sought to be achieved. Further, we do not think that the possibility that the procedure under ss. 38(1) and (3)(b)(iii) may be invoked in some cases and the procedure of the Companies Act in others, makes any difference, because the different procedures will be invoked to suit different situations, and it cannot be said that the Reserve Bank would act arbitrarily from case to case. The Reserve Bank, apart from its being a reasonable body, is answerable to the Central Government, and the public opinion is certainly strong and vocal enough for it to heed. If the Reserve Bank were to act mala fide, the Central Government and in the last resort, the Courts, will be there to intervene. In our judgment, the provisions of ss. 38(1) and (3)(6)(iii) cannot be said to be a breach of Art. 14 of the Constitution. That leaves over the second and third arguments, which proceed upon the same materials. In this connection, the main grounds of attack have already been set out in this judgment. Before we deal with the central point, we shall deal with c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law. The judicial process is excluded only in respect of the momentous decision whether a winding up order should be made or not. This opinion is left to the Reserve Bank, and the Court merely passes an order according to the Reserve Bank's opinion, and then proceeds to wind up the banking company according to law. The narrow question is whether in leaving this decision to the Reserve Bank the law offends the principles of natural justice, and becomes so unreasonable, viewed in the light of Art. 19, as to become void. This is the point on which the respective parties joined issue and had much to say, and this is the crucial point in this case. In support of this contention, reliance on behalf of the appellant is placed upon certain cases of this Court, and we shall begin by noticing them in brief. The first case relied upon is A. K. Gopalan v. The State ([1950] S.C.R. 88.). In that case, the validity of ss. 3, 7, 10-14 of the Preventive Detention Act, 1950, was challenged on a petition under Art. 32 of the Constitution for a writ of habeas corpus. Certain observations of Kania, C.J., and Fazl Ali, J., were relied upon to show that the right to be heard and tried is the very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a subjective determination of the executive was in fact, upheld, and there are passages in the judgments of the majority to show that a judicial trial in cases of preventive detention was not considered necessary. In State of Madras v. V. G. Row ([1952] S.C.R. 597), SS. 15(2)-(b) and 16 of the Indian Criminal Law Amendment Act, 1908 [as amended by the Indian Criminal Law Amendment (Madras) Act, 1950], were called in question, inter alia, on the ground that they empowered the State to declare associations illegal by a notification without a provision for judicial enquiry. It was held by this Court that the conferral of authority on the executive Government to impose restrictions on the right of association without allowing the grounds of such imposition both in their factual and legal aspects to be duly tested in a judicial enquiry was a strong element to be taken into account in judging the reasonableness of the restriction. It was also added : "The formula of subjective satisfaction of the Government or of its. officers, with an Advisory Board thrown into review the materials on which the Government seeks to override a basic freedom guaranteed to the citizen, may be viewed as rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manage his property." The reason for striking down the section was that it completely negatived the fundamental right under Art. 19(1)(f)by making the enjoyment of the right to depend on the mere discretion of the executive. The absence of any provision which would enable the landlord held to be a habitual infringer of the rights of his tenants, to have recourse to a Civil Court to test the correctness of the determination against him was held to create the invalidity. It is to be noticed that the learned Attorney-General in that case conceded the point, but the reason behind the rule appears to be that the law there prescribed a punishment or penalty for the bad behaviour of the landlord, and no person should be punished without having an opportunity to show cause.. The question, therefore, is, can the ruling be made applicable ? It does not lay down any general principle applicable to all cases beyond the one we have mentioned. The action to wind up a banking company cannot be said to be a punishment for mismanagement but action designed to preserve the rights of the depositors, and the two situations are hardly similar. The next two cases relied upon were The Commissioner, Hind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act II of 1952 which had been passed but not brought into force. The Orissa Act XVIII` of 1954 on receiving the assent of the President came into force at once, and Act II of 1952 became amended and modified. The 1952 Act was then brought into force from January 1, 1955, by a notification. By the new Act, which provided for the same subject-matter as the Act of 1939, the right of suit still remained taken away, but a right of appeal direct to the High Court was provided. It was contended again that the Act continued to be bad for the reasons given in the earlier case of 1951. This Court then observed : "It is further urged that the initial decision in a scheme-proceeding is still on the basis of an executive enquiry by an executive officer and that in any case a direct appeal to the High Court as against the Commissioner's order cannot be as adequate a safeguard regarding the rights of Mahants as a suit and a right of' appeal therefrom in the ordinary course to the higher courts would be. It is undoubtedly true that from a litigant's point of view an appeal to the High Court from the Commissioner's order is not the same as, an independent right of suit and an app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer and (b) in pursuance of procedure prescribed by the Executive Government. The Court said that "this was merely a theoretical possibility". The absence of a preliminary enquiry in No. (3) was not considered a serious point. The order of the executive officer in No. (1) was held not of importance, as the Commissioner was a Subordinate Judge of the Orissa Judicial Service. The question of procedure (No. 2) was also not considered impor- tant, because the procedure prescribed by rules resembled that of trial of suits. As regards the right of appeal, s. 79A gave a right in all decided cases, and that was considered enough; but whether it was invoked or not in all cases does not appear to have been ascertained. It would appear from these three decisions that the gist of reasonableness was held to be not so much in the label of the officer as in a judicial approach to the question to be decided according to a procedure which gave an adequate hearing. That the Commissioner was a judicial officer of the rank 'of a Subordinate Judge was considered enough for up holding his action as reasonable. That every decision should be by the Court was thus not the proposition laid down. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g liberty, rights or property must always be made by a judicial tribunal and none else, does not find support from the cases above considered. It is enough to say that the Reserve Bank in its dealings with banking companies does not act on suspicion but on proved facts. These facts are statutorily required to be submitted to the Reserve Bank, and the Reserve Bank further inspects the banking companies. It licenses such banking companies as conduct their affairs in the interests of the depositors, and can withdraw the licence if they do not. With such a statutory access to the affairs of a banking company, there is sufficient guidance in the words detrimental to the interests of the depositors' to show to the Reserve Bank when and how the power is to be exercised. Indeed, in this case itself, the Reserve Bank has given an easily understandable view of the monetary position of the Palai Bank. By comparing the total demand and time liabilities of the Palai Bank with the liquid assets, borrowing power and realisable advances, the Reserve Bank has shown the inability of the Palai Bank to meet lawful demands, and a state of affairs is disclosed, which is certainly not beneficial to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the exercise of it must, therefore, be left to the subjective satisfaction of the Government...... To make the exercise of these powers justiciable and subject to the judicial scrutiny will defeat the very purpose of the enactment." These observations lay down clearly that there may be occasions and situations in which the legislature may, with reason, think that the determination of an issue may be left to an expert executive like the Reserve Bank rather than to Courts without incurring the penalty of having the law declared void. The law thus made is justified on the ground of expediency arising from the respective opportunities for action. Of course, the exclusion of Courts is not lightly to be inferred nor lightly to be conceded. The reasonableness of such a law in the total circumstances will, if challenged, have to be made out to the ultimate satisfaction of this Court, and it is only when this Court considers that it is reasonable in the individual circumstance that the law will be upheld. In the present case, in view of the history of the establishment of the Reserve Bank as a central bank for India, its position as a Banker's Bank, its control over banking companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... States of America and Japan, the closure of banks and also their liquidation proceed from executive action. Under the Banking Law of Japan(Law No. 21, March 30,1929), Arts. 22, 23, 24 and 27 provide that the competent Minister would decide such issues. Article 22 may be read in this connection : "If the competent Minister finds it necessary to do in view of the affairs of a bank or the conditions of its property, he may order it to suspend business, deposit property with official depository, or issue any such order as may be necessary." (Japanese Laws Relating to Banks-Eibun-Horei-Sha, Inc. Tokyo Japan, p. VI (BA 4). It is also interesting to note that Arts. 22 and 29 of the Japanese Constitution guarantee to the people the freedom to own property and choose occupations, much as has been done under our Constitution. In the United States of America, Banks are regarded as proper subject of legislative regulation under the police power (Corpus Juris Secundum, Vol. IX. paras 4 and 5, p. 32), and this power is not subject to the limitations arising from the Fourteenth Amendment, except that it must be reasonably exercised. The Banks in the United States being either National or State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l power by the legislature. The statute book is full of instances in which the Courts of Civil Judicature guide themselves by the decision of an outside agency. The Arbitration Act itself affords a readily available instance. Under that Act the Court passes its decree on an award of almost any one the parties may choose. Nor is the possibility of a mistake by the Reserve Bank of such vital consequence. If the Reserve Bank acts in good faith and with circumspection, there is as much or as little chance of error as before a Court of law. Lastly we do not think that this was a case in which some lesser action like moratorium or amalgamation or reconstruction would have been feasible. The difficulty of the Palai Bank was the nature of its advances, which were either not recoverable or not easily recoverable. A moratorium with the limitation of time involved in it would not have been an adequate measure, and amalgamation and reconstruction were out of question at the stage which had been reached. We are thus satisfied that ss. 38(1) and (3)(b)(iii) of the Banking Companies Act are neither discriminatory nor unreasonable, and cannot be declared void under Arts. 14 and 19 of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank chose to do neither and "the Reserve Bank far from having acted without material or in a hasty and ill- considered manner, had, doubtless alive to grave responsibility placed upon it to preserve the banking structure of the country, acted with a degree of care and circumspection which has drawn to it adverse criticism from those who do not share its responsibility. Faced with the run it would have failed in its duty by the depositors had it not acted as it did." The history of the Banking Companies Act and how it came to be enacted is this. The Government of India appointed the Indian Central Banking Enquiry Committee which made its report on June 2, 1931. In para. 674 it pointed out the principal causes of failures of Banks. By Act 2 of 1936 Part XA was introduced into the Indian Companies Act of 1913 and that part dealt with Banking Companies but no separate and special provision was made for the winding up of banking companies. In 1934 the Reserve Bank of India Act (Act II of 1934) was enacted. There were minor amendments in the Indian Companies Act in regard to Banking Companies by Acts 21 of 1942 and 4 of 1944. On January 15, 1946 Banking Companies Ordinance (4 of 1946) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king in accordance with the provisions of the Reserve Bank Act. Section 7 deals with management and it gives to the Central Government the power to give such directions to the Bank after consultation with the Governor of the Bank which are considered necessary in the public interest. The Central Board of the Bank is constituted under s. 8 and it consists of the Governor four Directors nominated by the Central Government from amongst the local Boards, six Directors nominated by the Central Government and one Government official to be nominated by the Central Government. In other words all the Directors are nominees of the Central Government. By s. 11 tile Central Government has the power of removing the Governor or any Director and casual vacancies are also to be filled by the Central Government under s. 12. Section 17 deals with the business which the bank may transact and Chapter III relates to Central banking functions. Under s. 30 the Central Govern- ment has the power to supersede the Central Board and to entrust it to such agency as it may determine It will thus be seen that the Reserve Bank is an institution established for the purpose of carrying on central banking functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any time and on being directed by the Central Government shall cause an inspection to be made of any banking company. Sub-section (4) of that section reads:- "The Reserve Bank shall, if it has been directed by the Central Government to cause inspection to be made, and may, in any other case report to the Central Government on any inspection made under this section, and the Central Government, if it is of opinion after considering the report that the affairs of the banking Company are being conducted to the detriment of the interests of its depositors may, after giving such opportunity to the banking company to make a representation in connection with the report as, in the opinion of the Central Government, seems reasonable by order in writing. (a)prohibit the banking company from receiving fresh deposits; (b)direct the Reserve Bank to apply under section 38 for the winding up of the banking company: Provided that the Central Government may defer, for such period as it may think fit, the passing of an order under this sub- section, or cancel or modify any such order, upon such terms and conditions as it may think fit to impose." Under s. 35A power is given to the Reserve Bank to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by such report. In that case the High Court shall call for a report from the Reserve Bank on the affairs of the banking company and pass such order as may be proper in the circumstances. Under sub-section 3 the High Court can appoint a special officer to take into custody or control all assets, books and documents of the banking company and shall exercise such other powers as it thinks fit having regard to the interests of the depositors of the banking company. Under sub-s. 4 if the Reserve Bank is satisfied that a banking company in respect of which an order has been so made conducts its affairs in a manner detrimental to the interests of its depositors it can make an application to the High Court for the winding up of the company and where such an application is made the High Court shall not make any order extending the period. The impugned provision of section 38 which deals with winding up reads: - S.38 (1) "Notwithstanding anything contained in section 391, section 392, section 433 and section 583 of the Companies Act, 1956 but without prejudice to its powers under sub- section (1) of section 37 of this Act the High Court shall order the winding up of a banking company - (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (1) shall be sent by- the Reserve Bank to the registrar." Section 44A lays down the procedure for amalgamation of banking companies and s. 44B for restriction on the powers of the High Court to sanction compromise or arrangement between a banking company and its creditors unless compromise or arrangement is certified by the Reserve Bank as being capable of being worked as not being detrimental to the interest of the depositors Section 45 gives to the Reserve Bank the power to apply to the Central Government for an order of moratorium in respect of banking company which the Central Government may order and it also gives to the Reserve Bank the power to prepare a scheme for reconstitution or amalgamation. Sub-section (1) and (2) of s. 45 are as follows - S.45(1) "Notwithstanding anything contained in the foregoing provisions of this Part or in any other law or any agreement or other instrument for the time being in force, where it appears to the Reserve Bank that there is good reason so to do the Reserve Bank may apply to the Central Government for an order of moratorium in respect of a banking company. (2)The Central Government, after considering the application made by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up. Moreover the Government can direct the Reserve Bank to make such an application so that the Executive Government can take any banking company into liquidation. The power given in sub-s. (3)(b)(iii) of s. 38 it; still more drastic because if the Reserve Bank is of the opinion that the continuance of a banking company is prejudicial to the interest of the depositors it may apply for winding up; in other words on its subjective satisfaction it may apply and if it does so the High Court has no option but to order the winding up it is this provision to which strong objection has been taken by the appellant and is assailed by him. This provision was sought to be supported on behalf of the Reserve Bank by the learned Attorney-General who first drew our attention to the facts of the present case and to the various opportunities which were given to the Palai Bank since 1952 to carry out certain directions and on different occasions the Palai Bank had made representations and its Directors had interviewed the officers of the Reserve Bank and had given explanations till ultimately on July 21, 1960, the Reserve Bank called upon the Palai Bank to carry out certain directions which were enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res- trictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict. and also to the following observation at p. 608 : "As pointed out by Kania, C. J.,at p. 121 quoting Lord Finlay in Rex v. Halliday (1917) A. C. 260, 269, the courtwas the least appropriate tribunal to investigate into circumstances of suspicion on which such anticipatory action must be largely based." But in that very case the learned Chief Justice pointed out that the formula of subjective satisfaction of the Government with an Advisory Board thrown in to review the materials on which the Government seeks to override a basic guaranteed freedom can be viewed as reasonable only in very exceptional circumstances and within the narrowest limits and cannot receive judicial approval as a general pattern of reasonable restriction. In that case the court did not find any reasonableness in the claim of the Government to shut out judicial enquiry into the underlying facts. In support of the second submission reference was made to Virendra v. The State of Punjab ([1958] S.C.R. 308) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1958] S.C.R. 308.) and the present case is, in our opinion, wholly in apt. In Virendra's case(1) there was an agitation by a section of the Punjab public which was likely to have serious consequences on the public order and the tranquility of the state. It required quick measures to control it. The order was to meet an emergency, the order Could at the most remain applicable for two months and there was a provision for making a representation to the Government. In the case of a banking company, assuming that an urgency like that which existed in Virendra's case([1958] S.C.R. 308.) arises and a proper case is made out the Court will act with promptitude make such interim orders as the facts of the case may require e.g. the appointment of a provisional liquidator. There is one essential difference between V. G. Row's case([1952] S.C.R. 597, 607, 608) and Virendra's case ([1958] S.C.R. 308.) and the one before us. In the former two cases executive action of State Government was challenged. The Court there had not to give a judicial verdict in accordance with the opinions of the executive but had to determine the constitutionality of action already taken. It did not pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onferring authority upon the Bank Commissioner to wind up the affairs of the Bank. It is there stated that the fact of insolvency having been discovered the statute directs the Bank Commissioner's course and the designation by him of a person to wind up the affairs of the Bank which is no more a judicial act than his order to the Board of Directors to remove a dishonest cashier. "His powers are purely administrative, and in no way infringe upon the ancient authority of courts determine rights of person and property in specific controversies pending before them" Reference was also made to Corpus Juris Secundum, Vol. IX, p.844, para 425, where it is stated that under some statutes banking officials liquidating a Bank are not subject to the directions of a court. Again reference was made to Corpus Juris Secundum, Vol. 16A, pp.1219-1220, para. 711, where similar statement is made in regard to the same statutes. But the following passage from that paragraph is significant: "Legislation is in contravention of the guaranty where it takes away one's property and leaves him no remedy whatever by which he can regain it or obtain redress." In Corpus Juris Secundum, Vol. 16, p.506, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stockholder was not tantamount to vesting that officer with judicial power. In Ex parte Johan Chetwood ([1897] 165 U.S. 413 41 L. Ed. 782) it was held that the receiver of a national bank appointed by the Comptroller of Currency is not an officer of any court but agent and officer of the United States. The aid of American concepts, laws and precedents in the interpretation of our laws is not always without its dangers and they have therefore to be relied upon with some caution if not with hesitation because of the difference in the nature of those laws and of the institutions to which they apply. Mr. Nambiyar relied upon these different concepts and submitted that in U.S.A. the right to carry on business is not a fundamental right but is a "franchise", though, it has by legal interpretation, been brought within the fourteenth amendment arid the doctrine of "franchise" has no place in the Indian Constitution : C.S.S. Motor Service v. State of Madras (I.L.R. [1933] Mad. 304) approved in Saghir Ahmad v. State of U.P. ([1955] 1 S.C.R. 707, 718) Similarly the right to form a corporation is in U.S.A. a "franchise" or a "privilege" which can be withdrawn. To apply the analogy of Banks i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question to the Reserve Bank and the Reserve Bank shall, after taking into account, the principle of sound banking and other circumstances furnish to the authority a certificate, stating that the authority shall not take into account any amount as such reserve and such certificate shall be final. All that this case laid down was that such a provision balanced the interests of the parties and the delicate fabric of the credit structure of the country. Besides that provision relates to production and inspection of documents and relates to what facts can be taken into consideration by an Industrial Tribunal or whether a certificate by the bank is proof of a particular fact or not. Again what is applicable to a quasi-judicial authority like an Industrial Tribunal adjudicating upon industrial disputes seeking to do social justice may be inapplicable to Courts of law adjudicating upon the rights of a citizen to carry on his trade and avocation or not. Next case cited was Sajjan Bank v. Reserve Bank ([1959] 2 M L.J. 455.). That was a case where the validity of s. 22 of the Banking Companies Act was challenged on the ground of Art. 19(1) of the Constitution and it was held not to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enfaisance et de Retraite de la Police de Montrial ([1906] A.C. 535, 539.)condemned in the case of persons, other than, judges performing judicial functions, following a procedure "contrary to the rules of the ,society and above all contrary to the elementary principles of justices." The importance of the judicial process, was emphasised by Patanjali Sastri, C. J. in Ram Prasad Narain Sahi v. The State of Bihar ([1953] S.C.R. 1129, 1134.), a case where the dispute was between the State of Bihar and a private individual about the settlement of lands belonging to Bettiah Raj : "This is purely a dispute between private parties and a matter for determination by duly constituted courts to which is entrusted, in every free and civilised society, the important function of adjudicating on disputed legal rights after observing the well established procedural safeguards which include the rights to be heard, the right to produce witness and so forth. This is the protection which the law guarantees equally to all persons and our Constitution prohibits by Article 14: every State from denying such protection to anyone." No doubt there the question was raised under Art. 14 ; but it is the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court or courts to correct the errors if any of the tribunal of first instance. It was also emphasised in that case that the Commissioner had to be a member of the judicial service and the enquiry before the Commissioner was assimilated to and was governed by the provisions relating to the trial of suits by enjoining that as far as it might be it was to be in accordance with the provisions of the Code of Civil Procedure relating to trial of suits. The framing of a scheme in this manner was held not to be an unreasonable restriction on the rights of the Mahant under Art. 19(1) (f ). It is important to notice that there the right of appeal was in very wide and general terms both on facts and on law and it could relate not merely to the merits of the scheme but also to all basic matters the determination of which was implicit in the very framing of the scheme. The importance of the judicial power was pointed out by the Privy Council in Attorney-General for Australia v. The Queen and the, Boilermakers' Society of Australia ([1957] A.C. 288) where it was held that the function of an industrial arbitrator is completely outside the realms of judicial power and is of a different orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deny due process of law. In Halsbury's Laws of England, Vol. 7, (Simonds Edition), at p. 198 it has been stated that it is the right of a subject to have any dispute affecting him brought before a judicial tribunal and tried in accordance with the principles of natural justice and that no party ought to be condemned unheard or to have a decision given against him unless he has been given a reasonable opportunity of putting forward his case. It was further submitted by the appellant that the Reserve Bank is entirely an executive body, and therefore a mandatory provision like s. 38 (1) and 38(3)(b)(iii) practically leaves the question of liquidation of banking companies in the hands of the Executive. By s. 7 of the Reserve Bank Act the Reserve Bank is required to act according to the orders of the Government. The directors of the Reserve Bank, according to s. 8 are all nominated by the Government. Under s. 38(2) the Reserve Bank is enjoined to apply for the liquidation of a bank if it is so directed by the Central Government and therefore any opinion formed by the Reserve Bank in regard to the insolvency or otherwise of a bank must necessarily be the determination of an imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial seal on the opinion of another which is absolute negation of the exercise of the judicial process. It was argued that the Reserve Bank, before it takes action, inspects, gives instructions, takes explanations and hears the banking company but it is not bound to do so. The vice of the impugned provision lies in (a) the power vested in the Reserve Bank to apply to the High Court for an order winding up a bank exercisable solely on its subjective satisfaction as to the existence of conditions prescribed by s. 38, and (b) the obligation imposed by law upon the High Court to make the order of winding up without at any time enquiring whether the conditions on which the application is founded do in truth exist. In adjudging the reasonableness of the restriction imposed by a statute the Court has to consider its purpose, the evil it intends to remedy and it tries to strike a balance between the interest of the aggrieved citizen and the larger public interest sought to be served by the statute ; the Court in each case considers whether the restriction imposed is appropriate, fair and reasonable. The Court will not uphold a restriction which is not necessary for achieving the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing company without making any enquiry as to the sufficiency or even the existence of the material on which its satisfaction depends. The provision making a litigant the Judge in his own cause is an absolute negation of the rule of law. It is the foundation of the edifice of our judicial system that no one shall be condemned unheard, however strong the circumstances against him may appear to be. He is entitled to be told., if the freedom of citizen is to have any reality, what he has done to merit punishment or penalty, be must be afforded an opportunity to deny the correctness of the charge and to set up his plea in denial or extenuation, and also be afforded an opportunity to persuade the authority imposing penalty or punishment that the appropriate order is not the one proposed against him. But by a stroke of the legislative pen all these protections which are the foundation of the rule of law are destroyed and the satisfaction of the Reserve Bank is made conclusive for entering a verdict for determination of the right of a banking company to continue to exist. In our view it would be a tragedy if by this and similar legislation citizens are to be convicted of offences, penalti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition of the Bank was deteriorating as each day passed. These are it must be observed, matters in dispute. Normally, 'it is the function of the judicial power to investigate whether a banking company should continue to function or should be liquidated. By the impugned provision the exercise of that judicial power is excluded. That exclusion is, in our opinion, not based on any inappropriateness of exercise of the judicial power, or existence of other compelling circumstances in the public interest, and is invalid because the statute, examined in the light of its repercussion on the fundamental right of the citizen is unreasonable. As we have shown above, under the Constitution the courts are the bulwark for the protection of the right of the citizens and they are a check on the vagaries, negligence and mistakes of the executive or on the high-handedness of one party before it against another. This Court has emphasised that the deprivation of the right to resort to court is an unreasonable restriction. It is true that in the present case an appeal to this Court has not been taken away but what is left is a wholly ineffective right of appeal because if the law is constitution th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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