C. M. Nayar ( 1 ) THIS judgment will dispose of two writ petitions, CWP No. 3885/96, Bari Doab Bank Ltd. v. Union of India and Ors. and CWP No. 4046/96,punjab Cooperative Bank Ltd. v. Union of India and Ors. , as they raise commonquestions of law. ( 2 ) THE facts of each case may be reproduced as follows :ban Doab Bank Ltd. v. Union of India b Ors- ( 3 ) THE petitioner Bank v/as started in the year 1915 and initially had twobranches till 1947. One branch was in Lahore and the other one was situated inhoshiarpur (Punjab ). It is further alleged that the Bank has always been a profit-making company and even at the time of partition in the year 1947 the Bank whileclosing down its business at Lahore repaid all its depositors whatsoever withoutany deductions. The Bank is situated in a backward under-developed area and isa small scale bank having only one branch. ( 4 ) THE provisions of Section 11 (3) of the Banking Regulation Act, 1949 (hereinafter referred to as the Act ) is cited in the petition to reiterate that the Bankis fully entitled to continue its business and there is no justification for issuance ofthe impugned order dated 30/09/1996 under Section 45 of the Act. Thefinancial position of the Bank regarding its total deposits is specified in paragraph9 of the petition which reads as follows :30. 9. 93 31. 3. 94 30. 9. 94 31. 3. 95 30. 9. 95 31. 3. 96total Deposits 97. 88 122. 76 139. 23 153. 95 166. 81 179. 84 (Rs. in lakhs)Total Advances 46. 50 49. 88 55. 10 83. 06 78. 88 73. 95 (Rs. in lakhs)Total Priority 2. 37 29. 61 37. 08 44. 26 46. 38 41. 57sector Adv. (Rs. in lakhs)% of Priority 69. 61 59. 36 67. 3 53. 2 58. 8 56. 21sector Adv. tototal Bankcredit Similarly, the liquidity position as on 30/09/1996 has been referred to inparagraphs 12 and 13 which read as follows : "12. That the liquidity position of the Bank as on 30/09/1996 hasbeen one of the best in the whole of India. The bank had liquid cash of Rs. 2,08,51,956. 93. The details of the liquidity position of the petitioner bank isas under:rs. Cash in hand 1,95,687. 45in Current A/c of SBI 21,58,288. 37other Banks 2,01,976. 70bonds 20,50,002. 00debentures 11. 201. 00govt. That the liquidity position of the Bank as on 30/09/1996 hasbeen one of the best in the whole of India. The bank had liquid cash of Rs. 2,08,51,956. 93. The details of the liquidity position of the petitioner bank isas under:rs. Cash in hand 1,95,687. 45in Current A/c of SBI 21,58,288. 37other Banks 2,01,976. 70bonds 20,50,002. 00debentures 11. 201. 00govt. papers 25,26,445. 00seven-Year National Savingcertificates 3,43,700. 00u. T. I. Certificates 25,54,013. 00 (At Book Value)Fixed Deposits with Banks 22,72,100. 00interest accrued on F. D. Rs. 3,47,226. 00shares (At Book Value) 6,94,143. 29interest accrued on Govt. Securities/bonds 6,75,328. 29loans granted againstsecurities of FDRs/kvps/ivps/lic policies etc. 6,11,101. 00 13. THAT on 30/09/1996 the petitioner bank is having Rs. 1,89,58,135. 00 90 as depositors money and Rs. 1,96,000. 00 of other outside liabilitiesresulting in a surplus of Rs. 16,97,821. 03 after paying of all the depositorswith complete interest and all its outside liabilities. This is without recallingany of its advances. Apart from the above, the Bank has advances to the tuneof Rs. 88,20,168. 86. The position as referred to in paras 15 and 16 above havebeen verified by Mr. V. O. Gopi, General Manager, Reserve Bank of India,department of Supervision, New Delhi on 1. 10. 1996 when he alongwith histeam of 3 more men visited the Bank at Hoshiarpur to serve the moratoriumorder. " ( 5 ) THE bank has three Directors and one Director is a nominee of Reservebank of India. The detailed discussion took place between the Chairman anddirectors of the petitioner bank and General Manager of the Reserve Bank of Indiaat Chandigarh on 12/04/1996 when it was required by the petitioner to take thefollowing steps which are stated in paragraph 15 of the petition : " (I) Dispose of its non-banking assets before 12/04/1997. The petitioner has already disposed of 70% of its non-banking assets and willbe able to dispose of the rest of the 30% within the stipulated time. (II) Secondly, the petitioner bank was required to submit plan for itsexpansion before 12/05/1996. The petitioner has already submittedtheir plan for expansion. However, the respondent No. 2 has yet toaccord its approval to the same for its implementation. (III) Thirdly, the petitioner bank was required to fill up the vacancy on theboard of Directors of the Bank by July, 1996. The said requirement wascomplied with within the stipulated time and its compliance wasreported to the Reserve Bank of India. However, the respondent No. 2 has yet toaccord its approval to the same for its implementation. (III) Thirdly, the petitioner bank was required to fill up the vacancy on theboard of Directors of the Bank by July, 1996. The said requirement wascomplied with within the stipulated time and its compliance wasreported to the Reserve Bank of India. (IV) Lastly, the petitioner bank was required to formulate its investmentpolicy by July, 1996. The petitioner bank also complied with this lastrequirement of the respondent and submitted the same to respondentno. 2 for its approval. " ( 6 ) ON the above basis it is contended that the petitioner Bank has beensuccessfully discharging its functions and has always been a profit making, taxpaying and dividend paying bank. It has never been involved in Stock Seam and anyother seam whatsoever. The Reserve Bank of India has never given any directionsto the petitioner bank under Section 35a of the Act. Therefore, it can be assumedthat the management of the bank has always been appreciated by the Reserve Bankof India and it has never felt any need to impose any condition or interfere therewithto improve the same. Similarly, no action was ever taken under Section 36 (AA)ofthe Act against any of the Directors of the Bank, Chairman, managerial staff and orany other staff of the bank and there has never been any complaint of any public manregarding functioning of the bank. The bank has survived despite long years ofterrorism in Punjab approximately for 10 years which did not have effect on itsprofits, deposits or advances much less the services rendered to its customers. There has never been any violation of the provisions of law, policy, rules ordirections issued by respondent No. 2 or respondent No. 1 and the bank has alwaysacted in furtherance of public interest and masses. The bank was advised vide letterdated 30/04/1996 to increase its paid-up capital to Rs. 10 crores by 30/06/1996failing which the Reserve Bank of India will view the matter seriously. The avermentin this regard is made in paragraph 27 of the petition which reads as follows : "27. That vide letter dated 30/04/1996, the General Manager of therespondent No. 2 advised the petitioner bank to increase its paid-up capitalto 10,00 crores by 30/06/1996 failing which the Reserve Bank of India willview the matter seriously. The avermentin this regard is made in paragraph 27 of the petition which reads as follows : "27. That vide letter dated 30/04/1996, the General Manager of therespondent No. 2 advised the petitioner bank to increase its paid-up capitalto 10,00 crores by 30/06/1996 failing which the Reserve Bank of India willview the matter seriously. The Manager of the respondent No. 2, Centralvista, Chandigarh sent a reminder vide letter dated 13/05/1996 whichwas received on 22/05/1996 by the bank, advising the petitioner bankto convene a meeting of Board of Directors to consider the advice of thereserve Bank of India to increase the capital to 10. 00 crores. Vide letter dated 26/07/1996, a detailed reply was sent to the respondent No. 2 on behalfof the petitioner bank in which it was categorically pointed out that the bankis meeting the capital risk adequacy ratio of 8% and on that date the capitalrisk adequacy ratio of the petitioner bank was 69. 8% as against the requirement of 8%. It was further submitted that under the Act, the bank is notrequired to maintain the capital of Rs. 10. 00 crores. It would be pertinent tosubmit here that under the Act it is not mandatory for the bank to man I0. 00crores capital and there are number of other banks including the Cooperative Banks and respondent No. 2 itself which are having paid up capital ofless than 10. 00 crores. It will be pertinent to submit that this request of therespondent No. 2 was in contravention of Section 11 (3) of the Bankingregulations Act whereunder the requirement for the petitioner bank whichis having only one branch in only one State is to have capital of only Rs. 50,000. The request of the Reserve Bank of India, therefore, was clearlycontrary to the provisions of the Act. However, at no point of time therespondent Nos. 2 to 5 ever gave any notice under any provisions of law,rules, notifications etc. , for any action for violation of the said directions. Thetrue copies of the letters dated 30/04/1996, 13/05/1996 and reply ofbank dated 22. 7. 1996 is enclosed as Annexure d (Colly ). "the impugned action by the respondents is because of the biased and mala fides andfor extraneous considerations by respondents 3,4 and 5. The all egations of mala fideincorporated in paragraphs 28 and 29 of the petition which read as follows : "28. 7. 1996 is enclosed as Annexure d (Colly ). "the impugned action by the respondents is because of the biased and mala fides andfor extraneous considerations by respondents 3,4 and 5. The all egations of mala fideincorporated in paragraphs 28 and 29 of the petition which read as follows : "28. That the action against the petitioner bank has been taken by therespondent because of the biased and main fides and for extraneousconsideration by the respondent No. 3 to respondent No. 5. The respondentno. 4 about three years back i. e. somewhere in the year 1993, was workingas Additional Chief Officer in the Department of Banking Operations anddevelopment, Reserve Bank of India, Central Office, Bombay. As a matterof practice, he used to require the Board of Directors of the banks under hissupervision, to appear before him at Bombay. The petitioner bank - a smallbank - requested him that whenever he is visiting the Delhi Office and orthe Chandigarh office of the Reserve Bank of India, he may meet the Boardof Directors in either of the said offices so that the huge expenses that thissmall bank has to meet to go all the way to Bombay, may be saved. On29. 1. 1993, the respondent No. 4 called the Board of Directors and thechairman of the petitioner bank to have a meeting witn him at the Delhioffice of the Reserve Bank of India regarding the inspection carried out bythe Inspector/s of the Reserve Bank of India regarding : e bank s positionas on 30. 9. 1991. In the said meeting as the Board of Directors entered themeeting room, respondent No. 4 abusively fired at one Director, Chairman,manager and the Legal Advisor of the petitioner bank as to why they cannotappear before him at Bombay office, and that he will not tolerate thisbehaviour of the officials and Board of Directors of the bank. The behaviourof the respondent No. 2 was unexpected of the designation he was holding. He was abusing the Director as well as other officials of the Bank. Thedirector of the Bank took strong objection to the abuses having hurled at himand the other officials of the bank. When the Director objected to the abusivelanguage saying that in last 82 years of existence of the Bank, no official ofthe Reserve Bank of India has ever behaved in this manner. The respondentno. Thedirector of the Bank took strong objection to the abuses having hurled at himand the other officials of the bank. When the Director objected to the abusivelanguage saying that in last 82 years of existence of the Bank, no official ofthe Reserve Bank of India has ever behaved in this manner. The respondentno. 3 immediately told the Director that he has wide powers and within 78hours he can get the moratorium imposed on the bank and finished itsidentity. When the Director objected to this and told the respondent No. 4that he cannot participate in such a meeting in this manner and he is walkingout of the meeting, the respondent No. 4 finding the situation out of control,immediately cooled down and requested the Director and other officials tocarry on with the meeting. Pertinent it will be to say that respondent No. 4has been appointed as Executive Director recently and is looking after thedepartment of Banking operations and Development. The respondent No. 4, who was nourishing the grudge against the petitioner bank it has beenreliably learnt, has moved the file for imposition of moratorium. 29. That so far as the respondent No. 3 is concerned, about 10 months back,one Mr. Vakil allegedly of M/s. Vatsa International Ltd.- a non-bankingfinance company - supposed to be based at Bombay, called upon the ex-Director of the petitioner bank namely Mr. Janak Raj telephonically and toldthat he has been asked to contract him by respondent No. 3. He told Mr. Janak Raj that Mr. S. P. Talwar has required him to convey that either thebank be sold to the said company otherwise he will get the moratoriumsanctioned on the petitioner bank. Not only this, on 29/09/1996,i. e. a day before the moratorium notification has been issued, one Mr. Chadha of M/s. Phoenix Intrenational Ltd.- a company operating fromdelhi, called upon Mr. Ashish Raj who is Director of the bank, telephonicallyand told that he has been asked by the respondent Nos. 3 and 4 to contacthim and inform that moratorium is likely to be sanctioned against the bankand the only way out for them is to sell or amalgamate the bank to hiscompany and that he is in a position to get the orders stalled. These factsclearly go to show that the respondent Nos. 3 and 4 were acting with biasedand mala fide attitude and for erroneous consideration. These factsclearly go to show that the respondent Nos. 3 and 4 were acting with biasedand mala fide attitude and for erroneous consideration. " ( 7 ) RESPONDENTS 1 and 6 have filed counter affidavit repudiating the averments made by the petitioner bank. Paragraphs 6, 7 and 8 read as follows : "6. That in the application under Section 45 (1) the Reserve Bank of Indiaclearly explained about the shortcomings in the functioning of the petitionerbank. The finding in regard to the shortcomings of the petitioner bank werebased on the enquiries conducted by the Reserve Bank of India from time totime. 7. I say that after considering the application under Section 45 (1) and thereport of enquiry conducted by the Reserve Bank it was decided by theministry of Finance that the order of moratorium is necessary in the interestof public, depositors and the banking system and therefore order ofmoratorium was passed under Section 45 (2) of the Act by the Ministry offinance on 30/09/1996. 8. While considering the application dated 16/07/1996 moved by thereserve Bank under Section 45 (1) of the Act the public interest, the interestof Depositors was kept in mind as of paramount consideration. Keeping inview all these factors and after carefully going through the statutoryprovisions i. e. the provisions of the Banking Regulation Act, the applicationunder Section 45 (1) and the report submitted by the Reserve Bank in regardto the petitioner bank it was decided by the Central Government that theorder of moratorium should be passed. " ( 8 ) SIMILARLY, counter affidavit is filed on behalf of respondent No. 2 whereinit is pleaded that (a) it is necessary to set out the salient features of the statutoryscheme of the Acts made by the Parliament for regulation of banking business,which unlike any other business, is a special kind of business. Banking business isthe business of acceptance of withdrawable deposits of money from the public forthe purpose of lending or investment. While that describes the ordinary nature ofbanking, that activity in a developing society and economy has acquired anevolutionary nature, in that the essence of banking business in such an economyinvolves banks operating as basic financial intermediaries and playing a key role inthe country s economy in general and mobilisation and distribution of the country ssavings in particular. Banks are the largest repositories of the nation s savings. Banks are the largest repositories of the nation s savings. Theconduct and affairs of the banks influence the various sectors of the economy. Theeconomic development of the country depends largely on the safety and soundnessof banking institutions. Banks are also the principal means for transmitting thecredit policies of the country. Having regard to the delicate position of a bank in thecountry s economy, the failure of the bark can have disastrous effect on the wholebanking system, having the potential of leading to systemic crisis with prejudicialeffect on the economy as a whole. In view of all these considerations, banking sectorhas been a highly regulated area all over the world. These principles governing thebanking business have been embodied in the banking laws of India namely thereserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. (b) The significance of the Reserve Bank s position as the Central Bank of thecountry needs no emphasis. As the Central Bank and as the primary regulator of thebanking business. Reserve Bank has been vested with very wide powers and is alsocharged with certain duties as reflected in the preambles to and the provisions ofthe two legislations referred to above. The preamble to the Reserve Bank of Indiaact states that the Bank is established, inter alia, generally to operate the currencyand credit system of the country to its advantage. The powers under the RBI Actas also under the Banking Regulation Act have been conferred on the Bank with aview to fulfil these objectives. It is submitted that various powers under the Bankingregulation Act are related to public interest or the interest of banking policy. Theexpression banking policy has been defined in Clause (ca) of Section 6 of thebanking Regulation Act as under : " (CA) "banking policy" means any policy which is specified from time-to-time by the Reserve Bank in the interest of monetary stability or soundeconomic growth, having due regard to the interests of the depositors, thevolume of deposits and other resources of the bank and the need forequitable allocation and the efficient use of these deposits and resources. "this definition and power conferred thereunder on the Reserve Bank tospecify the policy clearly reflect the object that the banks truly become theinstruments of transmitting economic policies including the credit policiesof the country in a manner expected of them and serve the cause of publicinterest. "this definition and power conferred thereunder on the Reserve Bank tospecify the policy clearly reflect the object that the banks truly become theinstruments of transmitting economic policies including the credit policiesof the country in a manner expected of them and serve the cause of publicinterest. It is the Reserve Bank s function to ensure, as best as it can, that thesaid object is achieved. Further, in view of the adverse effect that a bank sfailure may have on the economy, the statutes also aim that the Reservebank s powers are exercised not only to effectively handle the crisis in theaffairs of a banking company, but also to prevent a perceived failure or crisisin the affairs of the banking company. In respect of such matters, theparliament has vested full discretion in the Reserve Bank and the Centralgovernment so that it should be open for these authorities to decide,depending upon the contingencies, the various alternatives or combinationof them as provided by law to ensure protection of the interest of thedepositors, the public interest and the interest of banking policy; (E) It is beyond dispute that banks, as financial instrumentalities are requiredto strive to fulfil, not only the object of achieving commercial efficiency, butalso to serve the object of public interest. In fact, without serving publicinterest, no bank can legitimately claim any right to exist. It is inconceivablethat a bank, as an instrumentality of, and also being capable of wieldingpowerful weapons for transformation of the socio-economic structure of thesociety, can act without taking into account public interest and can act forfurtherance of private interests of a limited group of persons. It is submittedthat the petitioner bank was not contributing and was not capable ofcontributing, and moreover, not even desirous of contributing, to conductits affairs in a manner appropriate to fulfil the object of public interest. (D) It also needs to be appreciated that with the liberalisation in the economy,the banking sector is widely expanding necessitating basic changes in theprofiles of the banks in relation to the pattern of their shareholding, capitalstructure, management composition, as also operational systems, and eventhe very manner of conduct of banking business. The recent failures of someprivate sector banks and huge losses of public sector banks have onlyunderlined the need for such changes. The recent failures of someprivate sector banks and huge losses of public sector banks have onlyunderlined the need for such changes. Taking note of this, and the changingeconomic scenario as also the emerging competitive environment, it hasbecome imperative for the banks to become more professionally managed,widely capital based to have more diversified activities, to be more technically advanced. This, in turn, has also resulted in a policy by Reserve Bankfor consolidation of banking system and other measures in the interest of thebanking system of the country as a whole. Further, the recent failures of somebanks raising concern for the banking system have constrained Reservebank to take many steps to strengthen the financial soundness of the bankingsystem. Increasing the capital base of the banks is one such measure. Similarly, various other policy measures have been initiated to ensure betterquality of assets, induction of professional management, diversified creditportfolio, improved accounting systems, transparency in balance sheets,etc. ; (E) The petitioner bank was an unlicensed non-scheduled unit bank. Established in 1915, with a low capital base, the petitioner continued to maintainthe same profile throughout, without any change. It is submitted that thoughpurporting to be doing business of banking, the petitioner s income generation was not from banking business. This is clearly demonstrated by thefollowing facts and figures. (I) The broad financial indicators of the petitioner bank for the years endedmarch, 1993, 1994 and 1995 are as under : (Rupees in lakhs)1993 1994 1995 (i) Paidup capital222 (ii) Reserves445460 (iii) Owned funds (i + ii)465662 (iv) Deposits75119150 (v) Advances375080 (vi) Investments-4360 (vii) Net Profit387 (viii) Dividend-25%nil (i) The significant increase in profits of the bank for the last two years wasmainly due to income from sale of land which was Rs. 9. 27 lakh andrs. 6 lakh in 1993-94 and 1994-95 respectively. (II) The bank s request for declaration of dividend at the rate of 50% for theyear ending 31/03/1995 was not acceded to by the Reserve Bankfor the reason that. the profit was mainly due to sale of non-bankingassets of the petitioner bank. The profit at Rs. 7. 34 lakhs for the year1994-95 was inter-alia on account of inclusion of income to the extentof Rs. 6 lakhs from the sale of agriculural land which constituted 81. 7%. of the profit. But for this income from the sale of fixed assets, thepetitioner bank s operative profits would have been substantiallyreduced to Rs. 1. 34 lakh. 7. 34 lakhs for the year1994-95 was inter-alia on account of inclusion of income to the extentof Rs. 6 lakhs from the sale of agriculural land which constituted 81. 7%. of the profit. But for this income from the sale of fixed assets, thepetitioner bank s operative profits would have been substantiallyreduced to Rs. 1. 34 lakh. Similarly, for the year 1993-94, the bank hadtaken to income account a sum of Rs. 9. 27 lakhs representing the profiton sale of fixed assets. But for this income, the bank would havesuffered a loss of Rs. 1. 21 lakhs; (III) The other major source of the bank s income earning was its investment in fixed deposits in other banks and Government securities. It issubmitted that the petitioner bank was keeping a substantial portionof its funds in fixed deposits which is an activity more akin to nonbanking business. A bank is expected to deploy funds judiciously forthe development and promotion of economic activities and not merelyto make investments in fixed deposits and securities. (IV) Of the petitioner bank s total assets at Rs. 274. 92 lakhs as on 31/03/1996, only Rs 73. 95 lakhs constituted advances, which was only26. 89%. Further, of the bank s total earnings at Rs. 32. 21 lakhs, theincome by way of interest on advances was only Rs. 13. 42 lakhs (constituting only 41. 6% ). (V) The petitioner bank has claimed that against a stipulation of 8% capita Iadequacy ratio, it maintained capital adequacy ratio of 40. 63% as on 31/03/1996. A scrutiny of its asset portfolio reveals that the bankhad been deploying its resources in non-banking areas like deposits ,with banks, post offices. Government securities etc. which carry zerorisk weight, instead of providing credit to needy sectors of theeconomy. No doubt then, while the major banks having much largercapital base are having CRAR of 10-12% the petitioner bank byinvesting its valuable resources in non-banking activities had beenable to achieve a CRAR of 40%. This only supports the Reserve Bank sview that the petitioner bank s major activities were of non-bankingnature. (F) in the name of carrying on banking business, the petitioner bank as a matter of fact was mainly concentrating on investments in deposits withother banks, securities/shares and non-banking assets. Even as regards itsbanking business, the factual position did not reveal essential characteristicsof genuine banking. (F) in the name of carrying on banking business, the petitioner bank as a matter of fact was mainly concentrating on investments in deposits withother banks, securities/shares and non-banking assets. Even as regards itsbanking business, the factual position did not reveal essential characteristicsof genuine banking. It is relevant to note the following facts and figures inthis regard: (I) The bank had made hardly any progress in terms of depositmobilisation. The deposits were mainly received from the bank sdirectors and the concerns/companies/trusts in which the directorswere interested. (II) Similarly, the bank had also not made progress in terms of expansionin advances portfolio. Over 70% of the bank s total advances were concentrated in the hands of 10 borrowers as on 2/08/1991. Further, a major portion of total advances i. e. advances aggregating tors. 30. 42 lakhs and constituting 65. 4% of the total advances wereoutstanding in the names of 10 borrowers as on 30/09/1993. It was also revealed that 26% of total advances were coneentrated inthe hands of two concerns, namely, M/s. Shadi Lal Puri and M/s. Kailash Farms as on 30th September, 1995. It is is significant to note thatshri DeepakPuri of Hoshiarpur who is the owner of Kailash Farms andwhose farm is financed by the petitioner bank was a director of thepunjab Cooperative Bank Ltd. (now under moratorium) which bankwas also controlled by the owners of the petitioner bank. (G) the nature of operating of the petitioner bank was such as by no stretchof imagination, it could be treated as carrying on genuine banking businessas such. It is further submitted that whatever little banking business wasbeing conducted by the petitioner bank, it was mainly for the benefit of the majority shareholders and the directors of the bank. In this connection, it ispertinent to note the shareholding and management pattern of the petitionerbank. (I) the major chunk i. e. 90% of the petitioner bank s capital was shared byone family, viz. , the family of Shri Janak Raj, his relatives and concerns/trusts in which one or more of them was/were interested. (II) Consistent with the extent of shareholding, the management powerswere also wielded by the said family group. The overall managementof the petitioner bank was overtly vested in its Board of Directorswhich consisted of 3 Directors; one RBI nominee Director and thechairman. (II) Consistent with the extent of shareholding, the management powerswere also wielded by the said family group. The overall managementof the petitioner bank was overtly vested in its Board of Directorswhich consisted of 3 Directors; one RBI nominee Director and thechairman. As the major chunk of the bank s capital was shared by Shrijanak Raj s family, one of the Directors Shri Ashish Raj, son of Shrijanak Raj was playing a dominant role inbank s management. Therewere instances where decision in regard to sanction of advance,revision of interest rate, etc. were approved by only one director,namely, Shri Ashish which used to be invariably approved subsequently by the Board. The Chairman of the Board had no effective roleto play in the management as he had been delegated very limitedpowers, including power to grant advance which was restricted to Rs. 25,000. 00 only. All the seven meetings of the Board during the year1994-95 were held at Saharanpur, U. P. which was the place of residence of the aforesaid director though the bank s Registered/headoffice was at Hoshiarpur and it did not have any business interest atsaharanpur. (H) Similarly the following instances were cited by the respondents to justifythe order of moratorium : (I) The bank was holding shares of M/s. Straw Board Managementcompany aggregating to Rs. 1. 59 lakhs which was managed by Shrijanak Raj and Shri Ashish Raj. This investment did not yield anyincome and was also against Section 19 (3) of the Banking Regulationact. (II) The credit appraisal system of the bank continued to suffer fromvarious deficiencies. (III) The bank had no system of internal audit or concurrent audit. (IV) The bank did not dispose of the non-banking assets (land) in spite ofbeing pointed out repeatedly in the inspection reports of RBI. This wasalso in contravention of Section 9 of the Banking Regulation Act. (V) As regards management systems, there was no system of putting upthe review notes to the Board on important areas of the bank sfunctioning. (VI) The bank had been incurring huge expenses towards maintenance ofcar used by its Director, Shri Ashish Raj as also towards paying histelephone bills. (VII) The post-sanction supervision and control of advances portfolio wasdeficient in several aspects. (VIII) RBI directions on selective credit control were not properly followed. (VI) The bank had been incurring huge expenses towards maintenance ofcar used by its Director, Shri Ashish Raj as also towards paying histelephone bills. (VII) The post-sanction supervision and control of advances portfolio wasdeficient in several aspects. (VIII) RBI directions on selective credit control were not properly followed. ( 9 ) ON the above reasoning the respondent Reserve Bank of India was of theview that in order to decide the future setup of the petitioner bank, it was necessaryto impose moratorium in terms of the powers conferred under Section 45 (2) of theact. The proposal to convert the petitioner bank into a non-banking company wasmooted as long back as in 1984. The Board resolution in this regard was made inmay, 1984 followed by the shareholders resolution in June, 1984. The petitionerbank, however, had not taken any effective steps in that direction and though hadbeen repeatedly advised to take concrete steps to implement the decision to convertitself into a non-banking company. The Reserve Bank of India s letters dated 13/06/19 8/10/1988 and 2/12/1988 addressed to the petitioner bankwhich also suggested the amending of the name of the bank as Bari Doab Financeand Trading Ltd. have been filed with the counter-affidavit. no Objection Certificate was issued in October, 1991 for alteration of its memorandum of associationunder Section 49c of the Act. However, in the extraordinary General Meeting heldon 2/05/1992 the petitioner Bank had rescinded its earlier resolution regardingconversion into non-banking company. In this background, no option was left withthe Reserve Bank of India or Central Government and this was a fit case for exerciseof powers and denial of exercise of powers and in such cases, it is contended, wouldhave an adverse bearing on the Reserve Bank's powers and duties to regulate thebanking system in the national and public interest. The order of moratorium dated 30/09/1996 was accordingly issued and the notification reads as follows :"f. No. 17/15/96-BOAGovernment of Indiaministry of Financedepartment of Economic Affairs (Banking Division)dated the 30/09/19968, Asvina, 1918 (SAKA)Notification S. O. No. . . . . . . . . . (E ). The order of moratorium dated 30/09/1996 was accordingly issued and the notification reads as follows :"f. No. 17/15/96-BOAGovernment of Indiaministry of Financedepartment of Economic Affairs (Banking Division)dated the 30/09/19968, Asvina, 1918 (SAKA)Notification S. O. No. . . . . . . . . . (E ). In exercise of the powers conferred by Sub-section (2) ofsection 45 of the Banking Regulation Act, 1949 (10 of 1949), the Centralgovernment, after considering an application made by the Reserve Bank ofindia under Sub-section (1) of that section hereby makes an order ofmoratorium in respect of the Bari Doab Bank Ltd. for the period from theclose of business on the 30/09/1996 up to and inclusive of the 3 1/12/1996 and hereby stays the commencement or continuance of allactions and proceedings against that banking company during the period ofmoratorium, subject to the condition that such stay shall not in any mannerprejudice the exercise by the Central Government of its powers underclause (b) of Sub-section (4) of Section 35 of the said Act or the exercise bythe Reserve Bank of India of its powers under Section 38 of the said Act. 2. The Central Government hereby also directs that during the period ofmoratorium granted to it the Bari Doab Bank Ltd. shall not, without thepermission in writing of the Reserve Bank of India (a) grant any loan or advance, incur any liability, make any investment oragree to or disburse any payment, whether indischarge of its liabilitiesand obligations or otherwise, or enter into any compromise or arrangement, except to the extent and in the manner provided hereunder- (i) payment of a sum not exceeding Rs. 5,000. 00 of the total balance inevery savings bank or current account or any other deposit bywhatever name called, provided that no amount shall be paid toany depositor who is indebted to the bank in any way; (ii) incurring expenditure which has necessarily to be incurred inconnection with any suits or appeals filed by or against the decreesobtained by the said bank or for realising any amounts due to it,provided that if the expenditure in respect of each such suit orappeal ordecree or proceedings is in excess of Rs. 2,500. 2,500. 00, thepermission in writing of the Reserve Bank of India shall beobtained before it is incurred; (iii) incurring expenditure on any other item insofar as it is in theopinion of the banking company necessary for carrying on the day-to-day administration of the banking company, provided thatwhere the total expenditure on any item in any calendar monthexceeds the average monthly expenditure on account of that itemduring the six calendar months preceding the order of moratorium, or if no expenditure has been incurred on account of thatitem in the past exceeds a sum of Rs. 2,500. 00, the permission inwriting of the Reserve Bank of India shall be obtained before theadditional expenditure is incurred; (iv) payment of the amounts of any drafts or pay orders issued by thesaid bank and remaining unpaid on the date of which the order ofmoratorium comes into force; and (v) the amounts of the bills received for collection on or before the 30thseptember, 1996 and realised before, on or after that date : (b) sell, transfer or otherwise dispose of any of its immovable properties. 3. The Central Government hereby also directs that the Bari Doab Bank Ltd. may, during the period of the moratorium granted to it, make the followingfurther payments, namely, the amounts for repaying -loans or advancesgranted against Government securities or other securities, to the Bari Doabbank Ltd. by the Reserve Bank of India or the State Bank of India or any ofits subsidiaries or by any other bank and remaining unpaid on the date onwhich the order of moratorium comes into force. 4. The Central Government hereby further directs that during the period ofmoratorium the Bari Doab Bank Ltd. shall be permitted to operate itsaccounts with the Reserve Bank of India or with any other bank for thepurpose of making the payments aforesaid, provided that nothing in thisorder shall be deemed to require the Reserve Bank of India or any other bankaforesaid to satisfy itself that the conditions imposed by this order are beingobserved before any amounts are released in favour of the Bari Doab Bankltd. 5. The Central Government hereby further directs that the Bari Doab Bankltd. may, during the period of moratorium, return any bills which haveremained unrealised to the persons entitled to receive them on a requestbeing made in this behalf by such persons, if the bank has no right, or titlesto, or interest in, such bills. 6. 5. The Central Government hereby further directs that the Bari Doab Bankltd. may, during the period of moratorium, return any bills which haveremained unrealised to the persons entitled to receive them on a requestbeing made in this behalf by such persons, if the bank has no right, or titlesto, or interest in, such bills. 6. The Central Government hereby also airects that the Bari Doab Bank Ltd. may release or deliver goods or securities which have been pledged,hypothecated or mortgaged or otherwise charged to it against any loan, cashcredit or overdraft: (i) in any case in which full payment towards all the amounts due fromthe borrower or borrowers, as the case may be, has been received bythe bank, unconditionally; and (ii) in any other case, to such an extent as may be necessary or possible,without reducing the proportions of the margins on the said goods orsecurities below the stipulated proportions or the proportions whichwere maintained before the order of moratorium came into force,whichever may be higher. Sd/- (D. R. S. Chaudary)Joint Secretary to thegovernment of India"punjab Cooperative Bank Ltd. v. Union of India and Ors. ( 10 ) THIS bank was also put under moratorium vide notification issued on 30/09/1996 and the same is impugned in this petition. ( 11 ) THE petitioner bank herein was started in the year 1905 and initially had8 branches upto the year 1947. At the time of partition, five branches of the bankwhich were situated in Pakistan were closed. While closing down its business at thebranch situated in Pakistan the bank repaid all its depositors whatever in fullwithout and deduction. Earlier moratorium was imposed upon the petitioner bankin the year 1961 and on representation to the then Finance Minister Mr. Morarjidesai, the same was revoked as the bank was in a position to repay ali its depositors,if so required, within 24 hours. The bank today is having 9 branches, two of whichare situated in the backward areas of Punjab and one in semi-urban area of Punjab. Two other branches are situated in two important cities of Pun jab viz. Amritsar andjalandhar. It is further submitted that it has always been the policy of thegovernment to encourage the small scale enterprises especially serving the ruralmasses and backward areas. Section 11 (3) of the Act is cited to contend that therequired paid-up capital and reserves are Rs. Two other branches are situated in two important cities of Pun jab viz. Amritsar andjalandhar. It is further submitted that it has always been the policy of thegovernment to encourage the small scale enterprises especially serving the ruralmasses and backward areas. Section 11 (3) of the Act is cited to contend that therequired paid-up capital and reserves are Rs. 5 lakhs for any banking companysituated in India having all its business in one State, none of which is situated in thecities of Bombay and Calcutta and it has only one place of business. The provision,therefore, is that the maximum paid-up capital as well reserves the petitioner isrequired to maintain is only Rs. 5 lakhs. The financial position of the bank is statedin paragraphs 9 and 10 of the writ petition which read as follows :"9. That the financial position of the Bank regarding its total deposits, totaladvances, from 31/03/1994 to 3 1/03/1996 is as under :the following figures shall highlight bank's growth : (000's omitted)As on 31. 3. 1996 31. 3. 1994 31. 3. 1994deposits 355323 246820 182333advances 145869 97819 7298investments1046737143459467total business501192344139252631operatingprofits591627901. 05net profit27801802- 67. 43c/d Ratio41. 05%39. 71%38. 55%n. P. A/s12. 20%13. 93%27. 47%10. The growth % in the financial year ended 31. 3. 1996 and its comparisonto the average growth of Nationalised Banks and Old Private Sector banks, for theyear 1995-96 are furnished below :growth %punjab Coopnationalisedold Privatebank Ltd. Bankssector banks*depositsup by 44. 25%up by 13. 5%up by 12. 5%advancesup by 49. 12%up by 15%up by 24%investmentsup by 46. 53%up by 10%up by 5%'data based on figures published in Business Standard dated 29. 8. 1996. Period from 1. 4. 1996 to 30. 9. 1996during this period the bank has made still further progress despite the factthat the present Chairman joined on 3. 8. 1996. (000's omitted)As on 30. 9. 199631. 3. 1996 %increase in six monthsdeposits40028935532312. 65%advances1492821458692. 34%investments13068810467324. 85%profits3300*5916**-Capitaladequacyover 7%*04. 79%-Provisional"unaudited Figures **audited Figuresfor Half Yearfor Full Year"similarly in paragraphs 12 and 13 the liquidity position of the bank isquoted. These paragraphs as well as other paragraphs raising the plea ofmala fide may also be reproduced as under: 12. The petitioner bank is a financially sound profit making bank whosedeposits are not only sound but liquidity of the bank is such that it can payoff 67. 7% of its deposits i. e. Rs. 2706. 51 lakhs of deposits out of total depositsof Rs. 4002. The petitioner bank is a financially sound profit making bank whosedeposits are not only sound but liquidity of the bank is such that it can payoff 67. 7% of its deposits i. e. Rs. 2706. 51 lakhs of deposits out of total depositsof Rs. 4002. 89 lakhs without calling back on its advances. The details of theliquidity position of the petitioner bank is as under:rs. (Approx)Cash in hand 52,55,000. 00in Current A/c of SBI 69,09,000. 00other Banks 98,12,000. 00with RBI 4,47,85,000. 00central State/other Govt. approved securities 10,01,68,000. 00fixed deposits with Banks 7,32,05,000. 00shares and Debentures (at Book value) 3,05,19,000. 00loans granted againstsecurities of FDRs/kvps/ivps/lic policies etc. 3,96,000. 00motor Car 80,000. 00total Rs. 31,03,33,000. 00. 00 13. That on 30/09/1996 the petitioner bank is having Rs. 4003. 00lakhs as depositors money and Rs. 201. 81 lakhs of other outside liabilitiesand borrowings of Rs. 129. 44 lakhs. Apart from the above, the Bank hasadvances to the tune of Rs. 1492. 82 lakhs. " 21. That it will be pertinent to submit here that in December, 1993, the Boardof Directors of the petitioner bank and the Chairman held discussions withthe Chief Officer, Deptt. of Banking Operations and Development, RBI. Inthe said meeting, the said officer required the bank to increase its capital toatleast Rs. 10. 00 crores. The respondent No. 4 also was insisting in almost allthe meetings of the Board of Directors that respondent No. 3 desires it toincrease its capital to Rs. 10. 00 crores. He has been telling the Board ofdirectors that in case they will not increase it, he will search for a group whomay inject finances into the Bank and in that event he will manage to get thebank merged with some other bank or group. 22. In January, 1995, the respondent No. 4 got issued a letter dated 4/01/1995 giving totally illegal and unjustified advice, firstly regardingthe Board of Directors to involve itself in the key areas of the functioning ofthe bank and in monitoring recovery of sticky advances. It may be pointedout here that the said advice is contrary to the Company Laws as well as thereserve Bank of India guidelines in this regard. Under the Law the Boardof Directors is not entitled to involve itself in the functioning of a companyand of its day-to-day functioning. The second advice vide that letter was thatthe bank should take immediate steps to increase its capital to atleast Rs. Under the Law the Boardof Directors is not entitled to involve itself in the functioning of a companyand of its day-to-day functioning. The second advice vide that letter was thatthe bank should take immediate steps to increase its capital to atleast Rs. 10. 00 crores and if it is not possible it should initiate action for bank's mergerwith some other suitable bank or any other proper groups which are willingto bring in sufficient capital. The para 4 of the letter clearly shows thatrespondent No. 4 was bent upon dislodging the management of the bank andcompel the management to hand it over to some other group or to sell it off. It is worthwhile to submit here that it is none of the functions of the Reservebank of India to compel the management of a small bank to merge with largegroup and /or compel it to increase its capital beyond what is required underthe statutes especially Section I l (3) (i) of the Act. The Reserve Bank of Indiadoes not have any power to issue any advice which is in contravention of thestatutory limits prescribed by the Parliament. In the present case, therequirement of the Statutes u/sec. II of the Act that the bank should havethe capital reserves of Rs. 5. 00 lakhs. Therefore, the said advice by thereserve Bank of India was totally illegal, unjustified and uncalled for andwere beyond their jurisdiction. As a matter of fact this clearly establishes themala fide and arbitrary attitude of the respondent No. 4. True copy of letterdated 4/01/1995 is enclosed herewith as Annexure III'. 23. In continuation of its earlier malafide actions, the respondent No. 4 gotissued another letter to the bank on 13/06/1995 again categorically tellingthe bank that it has to meet the capital adequacy ratio by 31/03/1996and for the said purpose it was advised that the bank shall increase thecapital base or initiate action for its merger with any suitable bank orapproach for appropriate groups who are willing to bring in sufficientcapital. True copy of the letter dated 13/06/1995 is enclosed herewith asannexure 1v. 25. The above letters of the Reserve Bank of India were replied to. Indecember, 1995 to raise the capital of the bank, the management decided toissue rights issue and raised its capital. In the first step, rights issue of Rs. 15. 00 lakhs was issued as against existing capital of Rs. 10. 25. The above letters of the Reserve Bank of India were replied to. Indecember, 1995 to raise the capital of the bank, the management decided toissue rights issue and raised its capital. In the first step, rights issue of Rs. 15. 00 lakhs was issued as against existing capital of Rs. 10. 00 lakhs, simultaneously increasing the authorised capital to Rs. 1. 25 crores from Rs. 25. 00lakhs. The rights issue was issused as per SEBI guidelines and provisions ofcompany Law which the bank is bound to follow. The bank further decidedto increase its paidup capital to Rs. 50. 00 lakhs by raising another issueissued in March, 1996. Intimation in this regard was given to respondent No. 2. 31. That vide letter dated 21/10/1995, the Reserve Bank of India sentreport of the inspection u/sec. 35 of the Banking Regulations Act, 1949pertaining to the financial inspection as on 30/12/1994. It will bepertinent to submit here that inspection u / Sec. 35 is carried on by the officialsof respondent No. 2 at regular intervals for all nationalised banks andprivate sector scheduled and unscheduled banks. Whatever observationsare made by the inspectors are being brought to the notice of the management of the bank and wherever the Reserve Bank of India wants to advisethe bank to improve, it is being pointed out to the bank. In the said gist ofreport of October, 1995 because of the above biased and malafide attitude,the officials of the respondent No. 2 at the instance of respondent No. 4 basedtheir report on distorted figures, tried to show that the financial position ofthe bank is unsatisfactory and tried to level unfounded and baselessallegations against the bank. However in para 4 of the gist of report again itwas advised to the bank that it shall increase its paidup capital to atleast 10. 00crores and/or initiate action for its merger, as was advised to the bank videearlier letters of officials of the respondent No. 2. However, in the directionsissued alongwith the letter, there was no direction to the bank in this regard. 00crores and/or initiate action for its merger, as was advised to the bank videearlier letters of officials of the respondent No. 2. However, in the directionsissued alongwith the letter, there was no direction to the bank in this regard. The directions contained basically were regarding the involvement of theboard of Directors in the key areas of the functioning of the bank, monitoringof the non-performing advances, reviewing the progress of the bank quarterly, to improve the organisational setup, supervision and control over thecredits, improve profitability and better funds management, improve thecredit appraisal system of the bank and review of the credit reportsperiodically and submits its progress reports to the respondent No. 2. 33. Pursuant to the inspection carried out as on 29/12/1995 i. e. fewdays after the issuance of the earlier directions dated 21/10/1995received on 9/11/1995, another letter containing gist of inspectionreport seems to have been prepared by the officials of the respondent No. 2. The said letter containing gist of inspection report has so far not beenserved on the petitioner bank by the respondent No. 2 officially. However,a copy of the said letter containing gist of inspection report dated 4/09/1996 has been handed over by Mr. M. P. Kothari who is the R. B. I. nominee Director on the Board of Directors of the petitioner bank. In the said ^letter containing gist of inspection report again, distorted figures of assetsand liabilities of the bank have been shown. However, even the latestinspection report which inspected banks working till 29. 12. 1995 highlighting the following points: (i) Deposits grew by 37. 7% and advances by 39. 5%. (ii) All the branches reported profits. (iii) Total amount of NPAs had come down to Rs. 174. 97 lacs as on29. 12. 1995 (13. 5% of total advances) as compared to Rs. 263. 95 lacs atthe time of last inspection (28. 4% of advances ). (iv) No new account with large balance had turned NPA since lastinspection i. e. from 29. 12. 1994. (v) Average Deposits in current A/cs with other banks had come downto 3. 4% as compared to 4. 7% during the previous year. (vi) Yield on investments had improved from average of 11. 5% to 12. 2% in1994-95. (vii) Bank had complied with CRR and SLR requirement. 12. 1994. (v) Average Deposits in current A/cs with other banks had come downto 3. 4% as compared to 4. 7% during the previous year. (vi) Yield on investments had improved from average of 11. 5% to 12. 2% in1994-95. (vii) Bank had complied with CRR and SLR requirement. Even in this report again it has been categorically mentioned that the Boardof Dirctors of the petitioner bank have not responded to the R. B. I, adviceissued as early as 4/01/1995 for strengthening the bank's capital baseby additional infusion of an amount of Rs. 10. 00 crores. The steps taken bythe bank to increase its capital base were said to be unsatisfactory and thebank was required to advise the respondent No. 2 within a month of receiptof the letter, steps taken by the bank to increase the capital funds. Again inpara 4, it was suggested that the bank should make serious efforts towardsalternative suggestion of the respondents of merger. However, again in thedirections issued alongwith the gist of inspection report, there was nodirection issued regarding increase of capital base to 10. 00 crores. Thedirectionsweregeneralinnatureregardingreviewoftheprogress,strengthening of the advance department, policy framework and for carrying outinspection of the branches, monthly review of recovery of non-performingadvances, improve organisational setup, take effective steps in the fundsmanagement, improve the advance department, submission of progressreports etc. " ( 12 ) COUNTER-AFFIDAVIT has been filed by respondents 1 and 6 wherein, interailia. , it has been pleaded that (a) the Reserve Bank of India submitted an applicationunder Section 45 (1) of the Act to the Ministry of Finance on 15/07/1996; (b) in theapplication the Reserve Bank of India clearly explained about the shortcomings inthe functioning of the petitioner bank. The finding in regard to the shortcomings ofthe petitioner bank were based on the enquiry conducted by Reserve Bank of Indiafrom time-to-time and it was decided by the Ministry of Finance that the order ofmoratorium was necessary in the interest of public, depositors and the bankingsystem and, therefore, order of moratorium was passed under Section 45 (2) of theact by the Ministry of Finance on 30/09/1996. ( 13 ) SIMILARLY, counter-affidavit is filed on behalf of Reserve Bank of India,respondent No. 2 wherein the following facts are pleaded : "5. The financial inspection of the petitioner bank carried out with referenceto its position as on 30. 9. 1993 showed a substantial erosion in the value ofits assets. ( 13 ) SIMILARLY, counter-affidavit is filed on behalf of Reserve Bank of India,respondent No. 2 wherein the following facts are pleaded : "5. The financial inspection of the petitioner bank carried out with referenceto its position as on 30. 9. 1993 showed a substantial erosion in the value ofits assets. The erosion as on 30. 9. 1993 was estimated at Rs. 193. 41 lakhs asagainst Rs. 75. 08 lakhs as on 30. 9. 1992. The provisions made on 30. 9. 1993against bad or doubtful debts at Rs. 19. 75 lakhs were grossly inadequate tocover the estimated loan losses at Rs. 111. 55 lakhs. As against depreciationof Rs. 8. 47 lakhs in the bank's current investments, provision held with thebank was Rs. 6. 20 lakhs which was inadequate. As a result of erosion inassets, not only the entire provisions (Rs. 19. 75 lakhs), reserves (Rs. 32. 95lakhs) and paidup capital (Rs. 10 lakhs) but also the deposits to die extent ofrs. 130. 75 lakhs had stood eroded. The continuous deterioration in thefinancial position of the petitioner bank was a matter of great concern for thereserve Bank. Despite directions issued to it by the Reserve Bank, thepetitioner bank had not taken effective steps to improve its working. 6. In view of the growing unsatisfactory financial position and the variousdeficiencies observed in the methods and operations of the petitioner bank,it was decided to continue to keep the bank's affairs under close surveillanceof the Reserve Bank of India. Accordingly specific directions were issued tothe petitioner bank from time-to-time. Another financial inspection of thepetitioner bank with particular reference to its position as on 30. 12. 1994 wascarried out by the Reserve Bank. The said inspection disclosed instances/persistence of several shortcomings/adverse features in the bank's working. Despite directions issued by the Reserve Bank, the bank had not takeneffective steps to improve its working except some improvement in balancing of books of certain branches and reduction in number of loss makingbranches. The inspection revealed that the financial position of the petitionerbank continued to be unsatisfactory. An estimated erosion in the value of theassets at Rs. 263. 63 lakhs comprising loan losses (Rs. 129. 86 lakhs), accumulated losses (Rs. , 104. 03 lakhs) and erosion in the value of other assets (Rs. 29. 74 lakhs) had affected not only the entire paidup capital, reserves/provisions of the book value of Rs. 250. An estimated erosion in the value of theassets at Rs. 263. 63 lakhs comprising loan losses (Rs. 129. 86 lakhs), accumulated losses (Rs. , 104. 03 lakhs) and erosion in the value of other assets (Rs. 29. 74 lakhs) had affected not only the entire paidup capital, reserves/provisions of the book value of Rs. 250. 72 lakhs, but deposits also stooderoded to the extent of Rs. 12. 91 lakhs. It is submitted that the erosion indeposits would have been much more but for a notional revaluation ofpremises to the extent of Rs. 116. 69 lakhs. There was a published net loss ofrs. 67. 43 lakhs. This also did not reflect the correct position inasmuch asthere was also a shortfall in provisions estimated at Rs. 32. 73 lakhs. Had afull provision been made, the losses would have been much more. 7. The Bank was last inspected with reference to its position as on 29. 12. 1995. The financial position of the bank continued to be unsatisfactory. Theestimated erosion in the value of its assets at Rs. 182. 44 lakhs had affectedthe provisions fully and reserves partly. The erosion would have affected thereservesand paidup capital fully and deposits also to the extent of Rs. 110. 37lakhs but for a notional revaluation reserve of Rs. 423. 17 lakhs. 8. Although the bank reported a profit of Rs. 18. 02 lakhs as on 31. 3. 1995, thesame was achieved by recognising non-realised interest of Rs. 15. 84 lakhs ofnon-performing assets, which was not correct and was also in violation ofthe Reserve Bank guidelines. The petitioner bank had also not booked arefund of excess interest of Rs. 3. 97 lakhs to its Profit and Loss A/c. It issubmitted that but for these irregular adjustments, the petitioner bankwould have incurred a net loss for the year 1994-95 also. 9. The position may be summarised as under :30. 9. 1993 30. 12. 1994 29. 12. 19951. Book value of paidup 74. 90 250. 72 517. 95capital, reserves in- (after revaluationeluding revaluation as stated in itemreserve) provisions 3 below)and other items not inthe nature of outsideliabilities. 2 *realand Exchangeable (-) 136. 69 (-) 12. 91 312. 80value of item (1) aftercounting for erosionof assets. 3. Revaluation 116. 69 423. 17reserve out of item (1 ). 4. Real and Exchangeable (-) 136. 69 (-) 129. 60 (-)110. 95capital, reserves in- (after revaluationeluding revaluation as stated in itemreserve) provisions 3 below)and other items not inthe nature of outsideliabilities. 2 *realand Exchangeable (-) 136. 69 (-) 12. 91 312. 80value of item (1) aftercounting for erosionof assets. 3. Revaluation 116. 69 423. 17reserve out of item (1 ). 4. Real and Exchangeable (-) 136. 69 (-) 129. 60 (-)110. 37value minus revaluationreserve.-The real and exchangeable value of capital and reserves is defined as the203excess of realisable value of assets as determined by the Inspecting Officerover the total outside liabilities of the bank. If the outside liabilities exceedthe realisable value of assets, it means that not only the bank's owned fundsincluding paidup capital, reserves, provisions, credit balance in profit andloss account etc. have been eroded but its deposits have also been eroded tothe extent of difference. lt will be seen from the above figures that consequent on erosion of its capitaland reserves, the provisions of Section 11 of the B. R. Act could also not becomplied with by the petitioner bank. For the purposes of that section valueof capital and reserves means the real or exchangeable value and notnominal value which may be shown in the books of the banking companyconcerned. The position stated above clearly demonstrates that the real orexchangeable value of the capital and reserves of the petitioner bank wasfully eroded and there was also erosion of the deposits of the bank. Referenceis further invited to Sub-section (6) of Section II in terms whereof if anydispute arises in computing the aggregate value of the paidup capital andreserve of any banking company,determination there of by the Reserve Bankshall be final for the purposes of the said section. 16. It is submitted that the decision to impose moratorium with a view todeciding the future setup of bank was taken based on the findings ofinspection of the bank conducted from time-to-time, the latest being withreference to its financial position as on 20. 12. 1995. The decision was takenafter due consideration of all relevant aspects, some time in May-June, 1996and a recommendation made to Government of India in this regard in July,1996. The financial position of the bank as on 31. 3. 1996 as submitted by thepetitioner bank, was neither available at the time of review nor is likely toaffect the decision so taken after careful consideration of all facts/relatedaspects. The bank's financial position as on 31. 3. The financial position of the bank as on 31. 3. 1996 as submitted by thepetitioner bank, was neither available at the time of review nor is likely toaffect the decision so taken after careful consideration of all facts/relatedaspects. The bank's financial position as on 31. 3. 1996 can therefore have nobearing on the moratorium order. "the provisions of law as contained in the Banking Regulation Act, 1949 which arerelevant may be reproduced as follows : "5. Interpretation.-In this Act, unless there is anything repugnant in thesubject or context,- (b) "banking" means the accepting, for the purpose of lending or investment,of deposits of money from the public, repayable on demand or otherwise,and withdrawable by cheque, draft, order or otherwise; (e) "banking company" means any company which transacts the business ofbanking in India. (ca) "banking policy" means any policy which is specified from time-to-timeby the Reserve Bank in the interest of the banking system or in the interestof monetary stability or sound economic growth, having due regard totheinterests of the depositors, the volume of deposits and other resources of thebank and the need for equitable allocation and the efficient use of thesedeposits and resources. 11. 11. Requirement as to minimum paidup capital and reserves- (3) In the case of any banking company to which the provisions of Subsection (2) do not apply, the aggregate value of its paidup capital andreserves shall not be less than- (i) if it has places of business in more than one State, five lakhs of rupees,and if any such place or places of business is or are situated in the cityof Bombay or Calcutta or both, ten lakhs of rupees; (ii) if it has all its places of business in one State none of which is situatedin the city of Bombay or Calcutta, one lakh of rupees in respect of itsprincipal place of business, plus ten thousand rupees in respect of eachof its other places of business situated in the same district in which ithas its principal places of business, plus twenty-five thousand rupeesin respect of each place of business situated elsewhere in the Stateotherwise than in the same district:provided that no banking company to which this clause applies shallbe required to have paidup capital and reserves exceeding an aggregate value of five lakhs of rupees:provided further that no banking company to which this clauseapplies and which has only one place of business, shall be required tohave paid-up capital and reserves exceeding aggregate value of fiftythousand rupees:provided further that in the case of every banking company to whichthis clause applies and which commences banking business for the firsttime after the commencement of the Banking Companies (Amendment)Act, 1962, the value of its paidup capital shall not be less than fivelakhs of rupees; (iii) if it has all its place of business in one State, one or more of which is orare situated in the city of Bombay or Calcutta five lakhs of rupees, plustwenty-five thousand rupees in respect of each place of business)situated outside the city of Bombay or Calcutta, as the case may be :provided that no banking company to which this clause applies shallbe required to have paidup capital and reserves exceeding an aggregate value of ten lakhs of rupees. Explanation.-For the purposes of this sub-section, a place of businesssituated in a State other than that in which the principal place of business ofthe banking company is situated shall, if it is not more than twenty-five milesdistant from such principal place of business, be deemed to be situatedwithin the same State as such principal place of business. 22. Explanation.-For the purposes of this sub-section, a place of businesssituated in a State other than that in which the principal place of business ofthe banking company is situated shall, if it is not more than twenty-five milesdistant from such principal place of business, be deemed to be situatedwithin the same State as such principal place of business. 22. Licensing of banking companies.- (1) Save as hereinafter provided, nocompany shall carry on banking business in India unless it holds a licenceissued in that behalf by the Reserve Bank and any such licence may be issuedsubject to such conditions as the Reserve Bank may think fit to impose. (2) Every banking company in existence on the commencement of this Act,before the expiry of six months from such commencement and every othercompany before commencing banking business in India, shall apply inwriting to the Reserve Bank for a licence under this Section :provided that in the case of a banking company in existence on thecommencement of this Act, nothing in Sub-section (1) shall be deemed toprohibit the company from carrying on banking business until it is granteda licence in pursuance of this section or is by notice in writing informed bythe Reserve Bank that a licence cannot be granted to it:provided further that the Reserve Bank shall not give a notice as aforesaidto a banking company in existence on the commencement of this Act beforethe expiry of the three years referred to in Sub-section ( I ) of Section 11 or ofsuch further period as the Reserve Bank may under that sub-section thinkfit to allow. (3) Before granting any licence under this section, the Reserve Bank mayrequire to be satisfied by an inspection of the books of the company orotherwise that the following conditions as fulfilled namely : (a) that the company is or will be in a position to pay its present or futuredepositors in full as their claims accrue; (b) that the affairs of the company are not being, or are not likely to be,conducted in a manner detrimental to the interests of its present orfuture depositors; (e) that the general character of the proposed management of the company will not be prejudicial to the public interest or the interest of itsdepositors; (d) that the company has adequate capital structure and earning prospects; (e) that the public interest will be served by the grant of a licence to thecompany to carry on banking business in India; (f) that having regard to the banking facilities available in the proposedprincipal area of operations of the company, the potential scope forexpansion of banks already in existence in the area and other relevantfactors the grant of the licence would not beprejudicial to the operationand consolidation of the banking system consistent with monetarystability and economic growth; (g) any other condition, the fulfilment of which would, in the opinion ofthe Reserve Bank, be necessary to ensure that the carrying on ofbanking business in India by the company will not be prejudicial to thepublic interest or the interests of the depositors. 35. Inspection.- (1) Notwithstanding anything to the contrary contained insection 235 of the Companies Act, 1956, the Reserve Bank at any time may,and on being directed so to do by the Central Government shall cause aninspection to be made by one or more of its officers of any banking companyand its books and accounts; and the Reserve Bank shall supply to the bankingcompany a copy of its report on such inspection. (IA) (a) notwithstanding anything to the contrary contained in any law forthe time being in force and without prejudice to the provisions of Sub-section (1), the Reserve Bank, at any time, may also cause a scrutiny to be made byany one or more of its officers, of the affairs of any banking company and itsbooks and accounts; and (b) a copy of the report of the scrutiny shall be furnished to the bankingcompany if the banking company makes a request for the same or if anyadverse action is contemplated against the banking company on the basis ofthe scrunity. (2) It shall be the duty of every director or other officer or employees of thebanking company to produce to any officer making an inspection under Sub-section (1) or a scrutiny under Sub-section (IA) all such books, accounts andother documents in his custody or power and to furnish him with anystatements and information relating to the affairs of the banking companyas the said officer may require of him within such time as the said officer mayspecify. (3) Any person making an inspection under Sub-section (1) or a scrutinyunder Sub-section IA may examine on oath any director or other officer oremployee of the banking company in relation to its business, and mayadminister an oath accordingly. (4) The Reserve Bank shall, if it has been directed by the Central Governmentto cause an inspection to be made, and may, in any other case, report to thecentral Government on any inspection or scrutiny made under this section,and the Central Government, if it is of opinion after considering the reportthat the affairs of the banking Company are being conducted to thedetriment of the interests of its depositors, may, after giving such opportunity to the banking company to make a representation in connection with thereport 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 upof the banking company :provided that the Central Government may defer, for such period asit may think fit, the passing of an order under this sub-section, or cancelor modify any such order upon such terms and conditions as it maythink fit to impose. (5) The Central Government may, after giving reasonable notice to thebanking company, publish the report submitted by the Reserve Bank orsuchportion thereof as may appear necessary. Explanation-For the purposes of this section, the expression "bankingcompany" shall include- (i) in the case of a banking company incorporated outside India, all itsbranches in India; and (ii) in the case of a banking company incorporated in India- (a) all its subsidiaries formed for the purpose of carrying on thebusiness of banking exclusively outside India; and (b) all its branches whether situated in India or outside India; (6) The powers exercisable by the Reserve Bank under this section in relationto regional rural banks may (without prejudice to the exercise of such powers by thereserve Bank in relation to any regional rural bank whenever it considers necessaryso to do) be exercised by the National Bank in relation to the regional rural banksand, accordingly. Sub-sections (1) to (5) shall apply in relation to regional ruralbanks as if every reference therein to the Reserve Bank included also a reference tothe National Bank. 35a. Power of the Reserve Bank to give directions : (1) Where the Reservebank is satisfied that- (a) in the public interest; or (aa) in the interest of banking policy, or (b) to prevent the affairs of any banking company being conducted in amanner detrimental to the interests of the depositors or in a mannerprejudicial to the interests of the banking company; or (e) to secure the proper management of any banking company generally;it is necessary to issue directions to banking companies generally or to anybanking company in particular, it may, from time-to-time, issue suchdirections as it deems fit, and the banking companies or the bankingcompany, as the case may be, shall be bound to comply with such directions. (2) The Reserve Bank may, on representation made to it or on its own motion,modify or cancel any direction issued under Sub-section (1), and in somodifying or cancelling any direction may impose such conditions as itthinks fit, subject to which the modification or cancellation shall have effect. 38. (2) The Reserve Bank may, on representation made to it or on its own motion,modify or cancel any direction issued under Sub-section (1), and in somodifying or cancelling any direction may impose such conditions as itthinks fit, subject to which the modification or cancellation shall have effect. 38. Winding up by High Court- (1) Notwithstanding anything contained insection 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 37of this Act, the High Court shall order the winding up of a bankingcompany- (a) if the banking company is unable to pay its debts; or (b) if an application for its winding up has been made by the Reserve Bankunder Section 37 or this section. (2) The Reserve Bank shall make an application under this section for thewinding up of a banking company if it is directed so to do by an order underclause (b) of Sub-section (4) of Section 35. (3) The Reserve Bank may make an application under this section for thewinding up of a banking company- (a) if the banking company (i) has failed to comply with the requirements specified in Section 11,or (ii) has byreason of the provisions of Section 22 become disentitled tocarry on banking business in India; or (iii) has been prohibited from receiving fresh deposits by an orderunder Clause (a) of Sub-section (4) of Section 35 or under Clause (b) of Sub-section (3a) of Section 42 of the Reserve Bank of Indiaact, 1934; or (iv) having failed to comply with any requirement of this Act otherthan the requirements laid down in Section 11, has continued suchfailure, or, having contravened any provision of this Act, hascontinued with contravention beyond such period or periods asmay be specified in that behalf by the Reserve Bank from time-to-time, after notice in writing of such failure or contravention hasbeen conveyed to the banking company; or (b) if in the opinion of the Reserve Bank- (i) a compromise or arrangement sanctioned by a Court in respect ofthe banking company cannot be worked satisfactorily with orwithout modifications; or (ii) the returns, statements or information furnished to it under or inpursuance of the provisions of this Act disclose that the bankingcompany is unable to pay its debts; or (iii) the continuance of the banking company is prejudicial to theinterests of its depositors. (4) Without prejudice to the provisions contained in Section 434 of thecompanies Act, 1956, a banking company shall be deemed to be unable topay its debts if it has refused to meet any lawful demand made at any of itsoffices or branches within two working days, if such demand is made at aplace where there is an office, branch or agency of the Reserve Bank, orwithin five working days, if such demand is made elsewhere, and if thereserve Bank certifies in writing that the banking company is unable to payits debts. (5) A copy of every application made by the Reserve Bank under Sub-section (1) shall be sent by the Reserve Bank to the Registrar. 45. Power of Reserve Bank to apply to Central Government for suspensionof business by a banking company and to prepare scheme of reconstitutionor amalgamation.- (1) Notwithstanding anything contained in the foregoing provisions of this Part or in any other law or any agreement or otherinstrument, for the time being in force, where it appears to the Reserve Bankthat there is good reason so to do, the Reserve Bank may apply to the Centralgovernment for an order of moratorium in respect of a banking company. (2) The Central Government, after considering the application made by thereserve Bank under Sub-section (1), may make an order of moratoriumstaying the commencement or continuance of all actions and proceedingsagainst the company for a fixed period of time on such terms and conditionsas it thinks fit and proper and may from time-to-time extend the period sohowever that the total period of moratorium shall not exceed six months. (3) Except as otherwise provided by any directions given by the Centralgovernment in the order made by it under Sub-section (2), or at any timethereafter, the banking company shall not during the period of moratoriummake any payment to any depositors or discharge any liabilities or obligations to any other creditors. (3) Except as otherwise provided by any directions given by the Centralgovernment in the order made by it under Sub-section (2), or at any timethereafter, the banking company shall not during the period of moratoriummake any payment to any depositors or discharge any liabilities or obligations to any other creditors. (4) During the period of moratorium, if the Reserve Bank is satisfied that- (a) in the public interest; or (c) in the interests of the depositors or (e) in order to secure the proper management of the banking company; or (d) in the interests of the banking system of the country as a whole,it is necessary so to do, the Reserve Bank may prepare a scheme (i) for the reconstruction of the banking company, or (ii) for the amalgamation of the banking company with any other bankinginstitution (in this section referred to as "the transferee bank") (5) The scheme aforesaid may contain provisions for all or any of thefollowing matters, namely- (a) the constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and privileges, the liabilities, dutiesand obligations of the banking company on its reconstruction or, as thecase may be, of the transferee bank; (b) in the case of amalgamation of the banking company, the transfer to thetransferee bank of the business, properties, assets and liabilities of thebanking company on such terms and conditions as may be specifiedin the scheme; (e) any change in the Board of Directors, or the appointment of a newboard of Directors, of the banking company on its reconstruction or,as the case may be, of the transferee bank and the authority by whomthe manner in which, and the other terms and conditions on which,such change or appointment shall be made and in the case of appointment of a new Board of Directors or of any director, the period forwhich such appointment shall be made; (d) the alteration of the memorandum and articles of association of thebanking company on its reconstruction or, as the case may be, of thetransferee bank for the purpose of altering the capital thereof or forsuch other purposes as may be necessary to give effect to the reconstruction or amalgamation; (e) subject to the provisions of the scheme, the continuation by or againstthe banking company on its reconstruction or, as the case may be, thetransferee bank, of any actions or proceedings pending against thebanking company immediately before the date of the order of moratorium; (f) the reduction of the interest or rights which the members, depositorsand other creditors have in or against the banking company before itsreconstruction or amalgamation to such extent as the Reserve Bankconsiders necessary in the public interest or in the interest of themembers, depositors and other creditors or for the main tenant of thebusiness of the banking company; (g) the payment in cash or otherwise to depositors and other creditors infull satisfaction of their claim (i) in respect of their interest or rights in or against the bankingcompany before its reconstruction or amalgamation; or (ii) where their interest or rights aforesaid in or against the bankingcompany has or have been reduced under Clause (f), in respect ofsuch interest or rights as so reduced; (h) the allotment to the members of the banking company for shares heldby them thereinbefore its reconstruction or amalgamation whethertheir interest in such shares has been reduced under Clause (f) or not,of shares in the banking company on its reconstruction or, as the casemaybe, in the transferee bank and where any members claim paymentin cash and not allotment of shares, or where it is not possible to allotshares to any members, the payment in cash to those members in fullsatisfaction of their claim (i) in respect of their interest in shares in the banking company beforeits reconstruction or amalgamation; or (ii) where such interest has been reduced under Clause (f) in respectof their interest in shares as so reduced; (i) the continuance of the services of all the employees of the bankingcompany (excepting such of them as not being workmen within themeaning of the Industrial Disputes Act, 1947 are specifically mentioned in the scheme) in the banking company itself on its reconstruction or, as the case may be, in the transferee banking at the sameremuneration and on the same terms and conditions of service, whichthey were getting or as the case may be, by which they were beinggoverned, immediately before the date of the order of moratorium :provided that the scheme shall contain a provision that (i) the banking company shall pay or grant not later than the expiryof the period of three years from the date on which the scheme issanctioned by the Central Government to the said employees thesame remuneration and the same terms and conditions of serviceas are, at the time of such payment or grant, applicable to employees of corresponding rank or status of a comparable bankingcompany to be determined for this purpose by the Reserve Bank (whose determination in this respect shall be final); (ii) the transferee bank shall pay or grant not later than the expiry ofthe aforesaid period of three years, to the said employees the sameremuneration and the same terms and conditions of service as are,at the time of such payment or grant, applicable to the otheremployees of corresponding rank or status of the transferee banksubject to the qualifications and experience of the said employeesbeing the same as or equivalent to those of such other employeesof the transferee bank ;provided further that if in any case under Clause (ii) of the first proviso anydubt or difference arises as to whether the qualification and experience ofany of the said employees are the same as or equivalent to the qualificationsand experience of the other employees of correspond ing rank or status of thetransferee bank, the doubt or difference shall be referred, before the expiryof a period of three years from the date of the payment or grant mentionedin that clause to the Reserve Bank whose decision thereon shall be final; (j) notwithstanding anything contained in Clause (i) where any of theemployees of the banking company not being workmen within themeaning of the Industrial Disputes Act, 1947 are specifically mentioned in the scheme under Clause (i), or where any employees of thebanking company have by notice in writing given to the bankingcompany or, as the case may be, the transferee bank at any time beforethe expiry of one month next following the date on which the schemeis sanctioned by the Central Government, intimated their intention ofnot becoming employees of the banking company on its reconstructionor, as the case may be, of the transferee bank, the payment to suchemployees of compensation, if any, to which they are entitled underthe Industrial Disputes Act, 1947, and such pension, gratuity, provident fund and other retirement benefits ordinarily admissible to themunder the rules or authorities of the banking company immediatelybefore the date of the order of moratorium; (k) any other terms and conditions for the reconstruction or amalgamation of the banking company; (1) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fullyand effectively carried out. (6) (a) A copy of the scheme prepared by the Reserve Bank shall be sent indraft to the banking company and also to the transferee bank and any otherbanking company concerned in the amalgamation, for suggestions andobjections, if any, within such period as the Reserve Bank may specify forthis purpose; (b) The Reserve Bank may make such modifications, if any, in the draftscheme as it may consider necessary' in the light of the suggestions andobjections received from the banking company and also from the transfereebank, and any other banking company concerned in the amalgamation andfrom any members, depositors or other creditors of each of those companiesand the transferee bank. (7) The scheme shall thereafter be placed before the Central Government forits sanction and the Central Government may sanction the scheme withoutany modifications or with such modifications as it may consider necessary,and the scheme as sanctioned by the Central Government shall come intoforce on such date as the Central Government may specify in this behalf:provide that different dates may be specified for different provisions of thescheme. ( 14 ) THE learned Counsel for the petitioner has contended as follows : (I) the impugned notification dated 30/09/1996 is invalid as therehas been non-application of mind by the Central Government andcannot be held to be issued in public interest. The same is, therefore,arbitrary, unjustified and smacks of nepotism. The financial positionof the banks are quite sound and there was no reason for impositionof moratorium orders. The petitioner banks were fully qualified tocontinue to do business under the provisions of Section 11 (3) of the Actand it was erroneous on the part of the respondents to ask thepetitioners to raise the Capital to Rs. 10 crores by effecting merger. Thisadvice was unreasonable, unjustified and inviolation of the principlesof law; (II) the approach of respondents 3 and 4 and other officials of respondentno. 2 is arbitrary mala fide and unjustified. The order of moratoriumhas been issued on extraneous considerations and cannot be sustainedin law; (III) Section 45 (1) of the Act requires Reserve Bank to make an applicationto the Central Government for grant of moratorium. Therefore, the RBIshould have communicated the reasons to the petitioner banks formating the said application and as a matter of fact should have calledupon them to state their shortfalls, if any, under Section 35 A by givingsufficient opportunity to comply with the directions. Therefore, the RBIshould have communicated the reasons to the petitioner banks formating the said application and as a matter of fact should have calledupon them to state their shortfalls, if any, under Section 35 A by givingsufficient opportunity to comply with the directions. (IV) the test of reasonableness and fair play has no tbeen satisfied in this caseand the dedsion is clearly arbitrary and violative of the provisions ofarticle 14 of the Constitution of India. The concept of fairplay is partof public policy and cannot be given a go-by in the present setup andthe rules of natural justice have been violated by the impugned action. ( 15 ) THE following judgments have been cited to support the proposition ascanvassed in this writ petition : 1. Commissioner of Police, Bombay v. Gordhandas Bhanji, AIR 1952supreme Court 16; 2. K. I. Shephard and Ors. , etc. etc. v. Union of India 6- Ors. , AIR 1988supreme Court 686; 3. Food Corporation of India v. M/s. Kamdhenu Cattle Feed Industries, (1993) I Supreme Court Cases 71; 4. L. I. C. of India and Anr. v. Consumer Education and Research Centre bors. , AIR 1995 Supreme Court 1811; and 5. Anirudhsinhji Karansinhji Jadeja and Anr. v. State of Gujarat, (1995) 5supreme Court Cases 302; ( 16 ) IN Commissioner of Police, Bombay (supra) the Hon'ble Supreme Courtheld as follows: "10. Turning now to the language used we are clear that by no stretch ofimagination can this be construed to be an order which in effect says, "i, soand so, by virtue of the authority vested in me, do hereby order and directthis and that". If the Commissioner of Police had the power to cancel thelicence already granted and was the proper authority to make the order, itwas incumbent on him to say so in express and direct terms. Publicauthorities cannot play fast and loose with the powers vested in them, andpersons to whome detriment orders are made are entitled to know withexactness and precision what they are expected to do or forbear from doingand exactly what authority is making the order. "in paragraph 20 of this judgment the Supreme Court has highlighted the fact thatthe ultimate Authority which is to exercise its powers must apply its mindindependently in exercise of powers conferred on it. Para 20 is cited in thisregard: "20. "in paragraph 20 of this judgment the Supreme Court has highlighted the fact thatthe ultimate Authority which is to exercise its powers must apply its mindindependently in exercise of powers conferred on it. Para 20 is cited in thisregard: "20. lt was contended that this would work greathardship in some cases andthat if money had already been expended on the building an estoppel at leastwould arise. No question of estoppel has been raised here, so that is not aquestion we needconsider nor need we answer the converse questionwhether an estoppel would hold good in the case of a law enacted for thepublic good on grounds of public policy; also whether there can be anestoppel when a person builds knowing the risk he runs of cancellation atany time under Rules 250. "reliance is next placed on the judgment as reported in K. I. Shephard and Ors. etc. etc. (supra ). The Court was dealing with the plea of the petitioners with regard to thechallenge to exclusion of the names of the employees in the scheme at a later stagein exercise of powers under Section 45 of the Act. In this case some excludedemployees had filed petition on the ground that they were not given hearing andthe relief of continuance of service was not granted. The Court directed that theexcluded employees should be absorbed on the same terms and conditions ofemployment under the respective Banking Companies prior to amalgamation. Thecontentions as taken read as follows : "allegation advanced on behalf of the excluded employees is that the draftscheme contemplated under Sub-section (6) (a) did not specifically mentionnames of the excluded employees and at a later stage when the scheme wassent up by the RBI to the Central Government a schedule containing thenames of the excluded employees was attached to each of the schemes. Section 45 of the Act provides a legislative scheme and the different stepsrequired to be taken under this section have been put one after the other. Areading of this section indicates a sequence-oriented pattern. What wouldordinarily be incorporated in the draft scheme is indicated in Sub-section (5 ). After the requirements of Sub-section (5) are complied with and the schemecomes to a presentable shape. Sub-section (6) (a) requires a copy thereof asprepared by RBI to be sent to the banking company (transferor) as also to thetrabsferee bank. What wouldordinarily be incorporated in the draft scheme is indicated in Sub-section (5 ). After the requirements of Sub-section (5) are complied with and the schemecomes to a presentable shape. Sub-section (6) (a) requires a copy thereof asprepared by RBI to be sent to the banking company (transferor) as also to thetrabsferee bank. Clause (b) of Sub-section (6) authorises RBI to makemodifications in the draft scheme as it may consider necessary in the lightof suggestions and objections received from the banking company and thetransferee Bank. On a simple construction of Sub-sections (5) and (6) and onthe basis of the sequence pattern adopted in Section 45 it would be legitimateto hold that the Act contemplates the employees to be excluded to bespecifically named in the draft scheme. Since it is a draft scheme preparedby RBI and the right to object or to make suggestions is extended to both thebanking company as also the transferee bank, and in view of the fact thatclause (i) of Sub-section (5) specifies this item to be a matter which may beincluded in the scheme, it must follow that the legislative intention is that thescheme would incorporate the names of such employees as are intended tobe excluded in accordance with the scheme. Once it is incorporated in thescheme the banking company as also the transferee bank would be entitledto suggest/object to the inclusion of names of employees. It may be that thenames of some of the employees may have been wrongly included and thebanking company, the hitherto employer, would be in a position to suggest/object to the inclusion of the names or it may even be that names of someundesirable employees which should have been left out have been omittedand the banking company as the extant employer of such employees shouldbe most competent to deal with such a situation to bring about rectificationby exercising the power to suggest/object to the draft scheme. The contention advanced on behalf of RBI that since it is open to it under Sub-section (6) (b) of Section 45 to make modifications of the draft scheme, even if thenames were not included earlier, at the stage of finalising the scheme forplacing it before the Central Government as required under Sub-section (7),the earlier non-inclusion is not a contravention is not acceptable. We are ofthe view that in case some employees of the banking company are intendedto be excluded, their names have to be specifically mentioned in the schemeat the draft stage. The requirement of specific mention is significant and thelegislature must be taken to have intended compliance of the requirementat that stage. Mr. Salve tor the RBI adopted the stand that the provisions ofsection 45 did not specifically concede a right of objection or making ofsuggestions to employees and in Sub-section (6) (b) mention was made onlyof members, depositors or other creditors. For the reason we have indicatedabove this aspect of the contention does not impress us. "the findings are recorded in para 15 as below : "15. Fairplay is a part of the public policy and is a guarantee for justice tocitizens. In our system of Rule of Law every social agency conferred withpower is required to act fairly so that social action would be just and therewould be furtherance of the well-being of citizens. The rules of natural justicehave developed with the growth of civilisation and the content thereof isoften considered as a proper measure of the level of civilisation and Rule oflaw prevailing in the community. Man within the social frame has struggledfor centuries to bring into the community the concept of fairness and it hastaken scores of years for the rules of natural justice to conceptually enter intothe field of social activities. We do not think in the facts of the case there isany justification to hold that rules of natural justice have been ousted bynecessary implication on account of, the time-frame. On the other hand weare of the view that the time limited by statute provides scope for anopportunity to be extended to the intended excluded employees before thescheme is finalised so that a hearing commensurate to the situation isafforded before a section of the employees is thrown out of employment. " ( 17 ) THE following passage from Food Corporation of India (supra) has beenreferred to: "7. In the contractual sphere as in all other State actions, the State and all itsinstrumentalities have to conform to Article 14 of the Constitution of whichnon-arbitrariness is a significant facet. There is no unfettered discretion inpublic law. A public authority possesses powers only to use them for publicgood. This imposes the duty to act fairly and to adopt a procedure which is'fairplay in action'. There is no unfettered discretion inpublic law. A public authority possesses powers only to use them for publicgood. This imposes the duty to act fairly and to adopt a procedure which is'fairplay in action'. Due observance of this obligation as a part of goodadministration raises a reasonable or legitimate expectation in every citizento be treated fairly in his interaction with the State and its instrumentalities,with this element forming a necessary component of the decision-makingprocess in all State actions. To satisfy this requirement of non-arbitrarinessin a State action, it is, therefore, necessary to consider and give due weightto the reasonable or legitimate expectations of the persons likely to beaffected by the decision or else that unfairness in the exercise of the powermay amount to an abuse or excess of power apart from affecting the bonafides of the decision in a given case. The decision so made would be exposedto challenge on the ground of arbitrariness. Rule of law does not completelyeliminate discretion in the exercise of power, as it is unrealistic, but providesfor control of its exercise by judicial review. "reference is next made to the judgment In L. I. C. of India ft Anr. (supra) ofwhich paragraphs 23 and 24 have been relied upon which read as follows : "23. Every action of the public authority or the person acting in publicinterest or its acts give rise to public element, should be guided by publicinterest. It is the exercise of the public power or action hedged with publicelement becomes open to challenge. If it is shown that the exercise of thepower is arbitrary, unjust and unfair, it should be no answer for the State,its instrumentality, public authority or person whose acts have the insigniaof public element to say that their actions are in the field of private law andthey are free to prescribe any conditions or limitations in their actions asprivate citizens simplicitor, do in the field of private law. Its actions must bebased on some rational and relevant principles. It must not be guided byirrational or irrelevant considerations. Every administrative decision mustbe hedged by reasons. The Administrative Law by Wade 5th Edn. at p. 513in Chapter 16. Part IV dealing with remedies and liabilities, stated thus- "until a short time ago anomalies used to be caused by the fact that theremedies employed in Administrative Law belong to two differentfamilies. It must not be guided byirrational or irrelevant considerations. Every administrative decision mustbe hedged by reasons. The Administrative Law by Wade 5th Edn. at p. 513in Chapter 16. Part IV dealing with remedies and liabilities, stated thus- "until a short time ago anomalies used to be caused by the fact that theremedies employed in Administrative Law belong to two differentfamilies. There is the family of ordinary private law remedies such asdamages, injunction and declaration and there is a special family ofpubic law remedies particularly certiorari, prohibition and manda-mus, collectively known as prerogative remedies. Within each family,the various remedies can be sought separately or together or in thealternative. But each family had its own distinct procedure. "at page 514 it was elaborated that "this difficulty was removed in 1977 bythe provision of a comprehensive, "application for judicial review", underwhich remedies in both facilities became inter-changeable. At page 573with the heading 'application for Judicial Review' in Chapter 17, it is statedthus: "all the remedies mentioned are then made inter-changeable by beingmade available 'as an alternative or in addition' to any of them. Inaddition the Court may award damageges, if they are claimed at theoutset and if they could have been awarded in an ordinary action. "the distinction between private law and public law remedy is now settledby this Court in LIC v. Escorts Ltd. , 1985 Supp. (3) SCR 909=air 1986 SC1370 at p. 1424, para 102, by a Constitution Bench thus : "if the action of the State is related to contractual obligation orobligations arising out of the Court (contract sic) the Court may notordinarily examine unless the action has some public law characterattached to it. The Court will examine actions of State if they pertainto the public law domain and refrain from examining them if theypertain to the private law field. The difficulty will lie in demarcatingthe frontier between the public law domain and the private law field. This is impossible to draw the line with precision and we do not wantto attempt it. The question must be decided in each case with referenceto the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the publiclaw or private law character of the action and a host of other relevantcircumstances. " 24. The question must be decided in each case with referenceto the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the publiclaw or private law character of the action and a host of other relevantcircumstances. " 24. In Dwarkadas Marfatia and Sons v. Board of Trustees of the Port ofbombay, (1989) 2 SCR 751 = air 1989 SC 1642 , it was held that the Corporation must act in accordance with certain constitutional conscience andwhether they have so acted must be discernible from the conduct of suchcorporations. Every activity of public authority must be informed byreasons and guided by the public interest. All exercises of discretion orpower by public authority must be judged by that standard. In that casewhen the building owned by the port trust was exempted from the Rent Act,on terminating the tenancy for development when possession was soughtto be taken, it was challenged under Article 226 that the action of the porttrust was arbitrary and no public interest would be served by terminatingthe tenancy. In that context, this Court held that even in contractual relationsthe Court cannot ignore that the public authority must have constitutionalconscience so that any interpretation put up must be to avoid arbitraryaction, lest the authority would be permitted to flourish as imperium aimperia. Whatever be the activity of the public authority, it must meet thetest or Article 14 and judicial review strikes an arbitrary action. "similarly reliance is placed on the judgment of the Supreme Court in Anirudhsinhjikaransinhji Jadeja and Anr. (supra) to reiterate the proposition that there is failureto exercise jurisdiction and discretion on the part of the Central Government as itis only the Reserve Bank which has been instrumental in issuance of the order ofmoratorium and has exercised powers which are not vested in it by Statute. ( 18 ) THE learned Solicitor General appearing for respondents 2 to 5 hasargued that on careful consideration of the matter the moratorium was imposedunder the provisions of Section 45 of the Act and there were good reasons so to do. The Reserve Bank of India as well as the Central Government have applied theirmind and as a consequence made an order of moratorium which is presentlyimpugned in these petitions. The Reserve Bank of India as well as the Central Government have applied theirmind and as a consequence made an order of moratorium which is presentlyimpugned in these petitions. Moratorium means suspension of business and thesubsequent provisions of Section have to be followed and an appropriate schemehas to be framed in public lnterest as well as in the interest of the depositors. Theseprovisions are so stated in Sub-sections (4) and (5) of Section 45 of the Act. Therespondents have carefully analysed the entire thing and have decided to amalgamate the petitioner banks with Oriental Bank of Commerce which will be in the publicinterest. The petitioners can, therefore, participate at that stage to put forward theirview-points and the present petition cannot be entertained. It is not denied that thepetitioner banks are operating without licence in view of the provisions as containedin Section 22. The more drastic remedy, in view of the current position of the banks,would be to apply the provisions of Section 38 which relate to winding up by thehigh Court but the Reserve Bank refrained from making any such application in thisregard to safeguard the interest of the depositors. ( 19 ) IT is next contended that the petitioners are not in fact carrying on bankingbusiness to fulfil the economic purpose and the policy to serve the need of thebanking business. Although the petitioners have been in existence for over 80 to 90years they could hardly record any progress in terms of the branch expansion,growth of business capital base etc. The banks are family controlled and are hardlydoing any genuine banking business. The total advances are concentrated in thehands of few borrowers and they are practically zero from few banking operations. The position of Punjab Cooperative Bank Ltd. is alleged to be in perillous condition. The provisions of Section II of the Act for minimum paidup capital and reservescan also not be complied with as its capital and reserves were wiped out. Sub-section (6) of Section II of the Act specifically states that if any dispute arises in computingthe aggregate value of paidup capital and reserves of the banking company adetermination thereof by the Reserve Bank of India shall be final for the purpose ofthis Section. Therefore, it is not open for the petitioners to dispute the real andexchangeable value of the capital and reserves of the petitioner Bank. Therefore, it is not open for the petitioners to dispute the real andexchangeable value of the capital and reserves of the petitioner Bank. It has beenin loss for the year ending 1993 of Rs. 48 lacs for the year ending 1994 of Rs. 67 lacsand for the year ending 31/03/1995 a nominal profit of Rs. 18 lacs was shownbut there was a carried forward loss of Rs. 97 lacs. The Reserve Bank of India toldthe Punjab Cooperative Bank Ltd. to take steps to bring at least Rs. 10 crores by wayof capital which would have helped to stop the deterioration and number ofcommunications were sent in this regard but no steps were taken. The Reserve Bankof India has categorically stated in this Court that in the circumstances of the case,the Reserve Bank does not think that reconstruction of the bank is the alternativebut it is proposed to amalgamate the bank with another bank i. e. Oriental Bank ofcommerce Ltd. , a nationalised public bank which will safeguard the interests of thedepositors. Therefore, the allegation of the petitioner with regard to mala fide haveno basis either in fact or in law. Similarly, submissions have been made with regardto Bari Doab Bank Ltd. This bank was also informed from 1984 onwards that itshould take steps to convert itself in to non-banking company if it desired to functionin the way in which it was functioning but the bank took no concrete steps to convertitself. In the above background it is reiterated that the respondents have carefullyanalysed the entire issues and found it just and practical to issue the orders ofmoratorium and ultimately to frame the scheme for amalgamation of the two bankswith Oriental Bank of Commerce. ( 20 ) THE question now arises as to whether it will be open for this Court toreview the decisions which have been taken by a specialised body like the Reservebank of India and arrive at different conclusions. The scope of jurisdiction in suchmatters has been settled by various judgments of the Supreme Court and the samemay be referred to at this stage. ( 21 ) IN Joseph Kuruvilla Vellukunnel v. Tile Reserve Bank of India and Ors. , (1962) Supp. The scope of jurisdiction in suchmatters has been settled by various judgments of the Supreme Court and the samemay be referred to at this stage. ( 21 ) IN Joseph Kuruvilla Vellukunnel v. Tile Reserve Bank of India and Ors. , (1962) Supp. 3 SCR 632, the position of the Reserve Bank of India is clearly statedin the following paragraphs which are referred to from 650-652 and 656 : "but the most important function of the Reserve Bank is to regulate thebanking system generally. The Reserve Bank has been described as abankers Bank. Under the Reserve Bank of India Act, the scheduled banksmaintain certain balances and the Reserve Bank can lend assistance to thosebanks "as a lender of the last resort". The Reserve Bank has also been givencertain advisory and regulatory functions. But its position as a Centra I Bank,it acts as an agency for collecting financial information and statistics. Itadvises Government and other banks on financial and banking matters, andfor the purpose, it keeps itself informed of the activities and monetaryposition of scheduled and other banks and inspects the books and accountsof scheduled bank and advises Government after inspection whether aparticular bank should be included in the Second Schedule or not. Everyscheduled bank is required to send to the Reserve Bank and to the Centralgovernment a weekly return of itsposition in a form, which is prescribed. Sometime, however, the Reserve Bank allows a particular bank to send itsreturns once a month instead of every week. From these returns, the Reservebank prepares and publishes consolidated statements showing the monetary position in the country. The inclusion of a bank in the Second Scheduleis the function of the Reserve Bank and under Sections 42 (6) (a) (iii ) and (b) (ii )it satisfies itself inter alia that the affairs of the particular bank are not beingconducted in a manner detrimental to the. interests of its depositors. Thereserve Bank has further the power to prohibit any scheduled bank fromreceiving, after a week, any fresh deposits. "the above analysis of some of the provisions of the Reserve Bank of Indiaact shows that the Reserve Bank of India has been created as a Central Bankwith powers of supervision, advice and inspection, over banks, particularlythose desiring that they be included in the Second Schedule or thosescheduled already. The Reserve Bank thus safeguards the economy and thefinancial stability of the country. The Reserve Bank thus safeguards the economy and thefinancial stability of the country. No doubt, the Board is composed ofnominated members, but from the nature of things, it could not be otherwise. Neither election nor competitive examinations can effectively take the placeof nominations, if the Board is to be composed of men of proved worth andstanding, and there is no other method which can even be contemplated - Nodoubt, the members of the Board are subject to removal, but neither integritynor efficiency is secured only by such guarantee and we have no reason tothink that the Reserve Bank acted in this case, or acts in other cases underpressure or from oblique motives. As was pointed out in another connectionby this Court in All Inilia Bank Employees Association v. National Industrial Tribunal:if it was not the Reserve Bank of India, the only other authority that couldbe entrusted with the function would be the Finance Ministry of thegovernment of India and that department would necessarily be guided bythe Reserve Bank having regard to the intimate knowledge which thereserve Bank has of the banking structure of the country as a whole and ofthe affairs of each bank in particular. "nor do the powers of the Reserve Bank end there. The Reserve Bank not onlyhas powers over banking companies while they are functioning, but it hasalso powers when the banking companies wish or are forced to cease tofunction. If a banking company wants to suspend its business and appliesto the High Court for a moratorium, the application is not maintainable,unless it is accompanied by a report of the Reserve Bank indicating that inthe opinion of the Reserve Bank the banking company will be able to pay itsdebts. When the High Court grants the relief without such report, it has tocall for a report from the Reserve Bank. The High Court is also required tohave regard to the interests of the depositors, and even during the period ofmoratorium granted by the High Court, the Reserve Bank can apply for thewinding up of the banking company. Sections 39 and 41-A give specialpowers to the Reserve Bank in winding up proceedings. Even in voluntarywinding up of a banking company, the Reserve Bank has to certify that thebanking company is able to pay in full all its debts to its creditors, as theyaccrue. In amalgamation of banking companies, the scheme has to beapproved by the Reserve Bank. Sections 39 and 41-A give specialpowers to the Reserve Bank in winding up proceedings. Even in voluntarywinding up of a banking company, the Reserve Bank has to certify that thebanking company is able to pay in full all its debts to its creditors, as theyaccrue. In amalgamation of banking companies, the scheme has to beapproved by the Reserve Bank. Similarly, in compromises or arrangementsbetween the banking company and its cretitors, the Reserve Bank has to besatisfied. In all these matters, the satisfaction, inter alia, must be as to theinterests of the depositors. In reconstruction of banking company after anapplication by the Reserve Bank for an order moratorium, the Reserve Bankhas to satisfy itself and prepare a scheme, which inter alia must be in theinterests of the depositors. "the feasibility and practicability of granting hearing, recording of reasons andcommunicating the same to the parties has been explained in the followingparagraphs from pages 660 and 672-674: "that leaves over the second and third arguments, which proceed upon thesame materials. In this connection, the main grounds of attack have alreadybeen set out in this judgment. Before we deal with the central point, we shalldeal with certain others which proceed, so to speak, from the side lines. Theobjection that the Reserve Bank gives no hearing, records no reasons inwriting and does not communicate them is met at least in this case by theadmitted facts. The numerous inspection reports and directions issued bythe Reserve bank over a period of nearly nine years, together with theapplication filed in this case, prove amply that there was enough hearing ofand enough communication of the grounds of action to, the Palai Bank. Thebank had also sufficient time and opportunity to establish its own point ofview before the Reserve Bank. lt was impossible that the Reserve Bank withthe run on the Bank, would sit down to decide after hearing whether to takeaction or not, while withdrawals were being made at the rate of Rs. 7 lakhsper day. The emergency of the situations, which may arise, is itself thejustification for the procedure open under the Act and taken in this case. Inour opinion, these grounds cannot be entertained. It is difficult to imaginethat the Reserve Bank would act differently in another case. 7 lakhsper day. The emergency of the situations, which may arise, is itself thejustification for the procedure open under the Act and taken in this case. Inour opinion, these grounds cannot be entertained. It is difficult to imaginethat the Reserve Bank would act differently in another case. The learned Attorney General, on the other side, drew our attention tovirendra v. The State of Punjab, where it has been pointed out that in judging thereasonableness of any particular law "the surround ing circumstances in which theimpugned law came to be enacted, the underlying purpose of the enactment and theextent and urgency of the evil sought to be remedied" must also be considered. Thatcase concerned the freedom of speech and its alleged curtailment by the Punjabspecial Powers (Press) Act, 1956. In judging the reasonableness of the law from theangle of the exclusion of Courts, this Court observed : "legislature had to ask itself the question : who will be the appropriateauthority to determine at any given point of time as to whether the prevailingcircumstances require some restriction to be placed on the right to freedomof speech and expression and the right to carry on any occupation, trade orbusiness and to what extent ? The answer was obvious, namely, that as thestate Government was charged with the preservation of law and order in thestate, as it alone was in possession of all material facts it would be the bestauthority to investigate the circumstances and assess the urgency of thesituation that might arise and to make up its mind whether any and, if so,what anticipatory action must be taken for the prevention of the threatenedor anticipated breach of the peace. The Court is wholly unsuited to gauge theseriousness of the situation, for it cannot be in possession of materials whichare available only to the executive Government. Therefore, the determination of the time when and the extent to which restrictions should be imposedon the Press must of necessity be left to the judgment and discretion of thestate Government and that is exactly what the legislature did by passing thestatute. Quick decision and swift and effective action must be of the essenceof these powers and the exercise of it must, therefore, be left to the subjectivesatisfaction of the Government. To make the exercise of these powersjusticiable and subject to the judicial scrutiny will defeat the very purposeof the enactment. Quick decision and swift and effective action must be of the essenceof these powers and the exercise of it must, therefore, be left to the subjectivesatisfaction of the Government. To make the exercise of these powersjusticiable and subject to the judicial scrutiny will defeat the very purposeof the enactment. These observations lay down clearly that there may be occasions andsituations in which the legislature may, with reason, think that the determination of an issue may be left to an expert executive like the Reserve Bankrather than to Courts without incurring the penalty of having the lawdeclared void. The law thus made is justified on the ground of expediencyarising from the respective opportunities for action. Of course, the exclusionof Courts is not lightly to be inferred nor lightly to be conceded. Thereasonableness 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 onlywhen 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 Reservebank as a Central Bank for India, its position as a Bankers' Bank, its controlover banking companies and banking in India, its position as the issuingbank, its power to license banking companies and cancel their licences andthe numerous other powers, it is unanswerable that between the Court andthe Reserve Bank the momentous decision to wind up a tottering or unsafebanking company in the interests of the depositors, may reasonably be leftto the Reserve Bank. No doubt, the Court can also, given the time, performthis task. But the decision has to be taken without delay, and the Reservebank already knowsintimately the affairs of banking companies and has hadaccess to their books and accounts. If the Court were called upon to takeimmediate action, it would almost always be guided by the opinion of thereserve Bank. It would be impossible for the Court to reach a conclusionunguided by the Reserve Bank if immediate action was demanded. But thelaw which gives the same position to the opinion of the Reserve Bank ischallenged as unreasonable. In our opinion, such a challenge has no force. It would be impossible for the Court to reach a conclusionunguided by the Reserve Bank if immediate action was demanded. But thelaw which gives the same position to the opinion of the Reserve Bank ischallenged as unreasonable. In our opinion, such a challenge has no force. The situation that arose in this case is typical of the occasion on which thisextraordinary power would normally be exercised, and, as we have saidalready, if the power is abused by the Reserve Bank, what will be struckdown would be the action of the Reserve Bank but not the law. An appealagainst the Reserve Bank's action or a provision for an ex post facto findingby the Court is hardly necessary. An appeal to the Central Government willbe only an appeal from Caesar to Caesar, because the Reserve Bank wouldhardly act without the Concurrence of the Central Government and thefinding by the Court would mean, to borrow the macabre phrase of Ramannayar,j a post-mortem examination of the corpse of the banking company. "the facts of the present cases, it is argued, required immediate action and the rightto a prior notice and an opportunity to be heard before an order was passed Wouldhave obstructed the taking of prompt action. The Supreme Court in Union of Indiaand Amr. v. Tulsi Ram Patel, (1985) 3 Supreme Court Cases 398, elaborated theconcept. The following portion from paragraph 101 may be noticed : "not only, therefore, can the principles of natural justice be modified but inexceptional cases they can even be excluded. There are well-defined exceptions to the memo judex in causa sua rule as also to the audi alteram partemrule. The memojudex in causa sua rule is subject to the doctrine of necessityand yields to it as pointed out by this Court in J. Mohapatra and Co. v. Stateof Orissa. So far as the audi alteram partem rule is concerned, both inengland and in India, it is well established that where a right to a prior noticeand an opportunity to be heard before an order is passed would obstruct thetaking of prompt action, such a right can be excluded. v. Stateof Orissa. So far as the audi alteram partem rule is concerned, both inengland and in India, it is well established that where a right to a prior noticeand an opportunity to be heard before an order is passed would obstruct thetaking of prompt action, such a right can be excluded. This right can also beexcluded where the nature of the action to be taken, its object and'purposeand the scheme of the relevant statutory provisions warrant its exclusion;nor can the audi alteram partem rule be invoked if importing it would havethe effect of paralysing the administrative process or where the need forpromptitude or the urgency of taking action so demands, as pointed out inmaneka Gandhi case at page 681. If legislation and the necessities of asituation can exclude the principles of natural justice including the audialteram partem rule, a fortiori so can a provision of the Constitution, for aconstitutional provision has a far greater and all-pervading sanctity than astatutory provision. " ( 22 ) THE scope of powers of Reserve Bank of India is further amplified in thejudgment reported as Peerless General Finance and Investment Co. Limited and Anr. v. Reserve Bank of India, (1992) 2 Supreme Court Cases 343. Paragraphs 30,31 and52 may be reproduced as under : "30. Before examining the scope and effect of the impugned paragraphs (6)and (12) of the directions of 1987, it is also important to note that Reservebank of India which is Bankers' Bank is a creature of statute. It has largecontingent of expert advice relating to matters affecting the economy of theentire country and nobody can doubt the bona fides of the Reserve Bank inissuing the impugned directions of 1987. The Reserve Bank plays animportant role in the economy and financial affairs of India and one of itsimportant functions is to regulate the banking system in the country. It is theduty of the Reserve Bank to safeguard the economy and financial stabilityof the country. While examining the power conferred by Section 58-A of thecompanies Act, 1956 on the Central Government to prescribe the limits upto which, the manner in which and the conditions subject to which depositsmay be invited or accepted by non-banking companies, this Court in Delhicloth and General Mills v. Union of India, observed as under: (SCC pp. 188-189, para 28)Mischief was known and the regulatory measure was introduced to remedythe mischief. 188-189, para 28)Mischief was known and the regulatory measure was introduced to remedythe mischief. The conditions which can be prescribed to effectuate thispurpose must and fortiori, to be valid, fairly and reasonably, relate to checkmate the abuse of juggling with the depositors'/investors' hard earnedmoney by the corporate sector and to confer upon them a measure ofprotection namely availability of liquid assets to meet the obligation ofrepayment of deposit which is implicit in acceptance of deposit. Can it besaid that the conditions prescribed by the Deposit Rules are so irrelevant orhave no reasonable nexus to the objects sought to be achieved as to bearbitrary ? The answer is emphatically in the negative. Even at the cost ofrepetition, it can be stated with confidence that the rules which prescribedconditions subject to which deposits can be invited and accepted do operateto extend a measure of protection against the notorious abuses of economicpower by the corporate sector, to the detriment of depositors/investors, asegment of the society which can be appropriately described as weaker inrelation to the mighty corporation. One need not go so far with Ralph Nadarin America incorporated to establish that political institutions may fail toarrest or control this ever-widening power of corporations. And can onewish away the degree of sickness in private sector companies ? To the extentcompanies develop sickness, in direct proportion the controllers of suchcompanies become healthy. In a welfare State, it is the constitutionalobligation of the State to protect socially and economically weaker segmentsof the society against the exploitation by corporations. We, therefore, see nomerit in the submission that the conditions prescribed bear no relevance tothe object or the purpose for which the power was conferred under Section58-A on the Central Government. ' 31. The function of the Court is to see that lawful authority is not abused butnot to appropriate to itself the task entrusted to that authority. It is wellsettled that a public body invested with statutory powers must take care notto exceed or abuse its power. It must keep within the limits of the authoritycommitted to it. It must act in good faith and it must act reasonably. Courtsare not to interfere with economic policy which is the function of experts. Itis not the function of the Courts to sit in judgment over matters of economicpolicy and it must necessarily be left to the expert bodies. It must keep within the limits of the authoritycommitted to it. It must act in good faith and it must act reasonably. Courtsare not to interfere with economic policy which is the function of experts. Itis not the function of the Courts to sit in judgment over matters of economicpolicy and it must necessarily be left to the expert bodies. In such matterseven experts can seriously and doubtlessly differ Courts cannot be expectedto decide them without even the aid of experts. 52. This Court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India,held that the RBI is "a bankers' bank and lender of the last resort". Itsobjective is to ensure monetary stability in India and to operate and regulatethe credit system of the country. It has, therefore, to perform a delicatebalance between the need to preserve and maintain the credit structure ofthe country by strengthening the rule as well as apparent credit worthinessof the banks operating in the country and the interest of depositors. Inunderdeveloped country like ours, where majority population are illiterateand poor and are not conversant with banking operations and in underdeveloped money and capital marked with mixed economy, the Constitutioncharges the State to prevent exploitation and so the RBI would play bothpromotional and regulatory roles. Thus the RBI occupies place of "preeminence" to ensure monetary discipline and to regulate the economy or thecredit system of the country as an expert body. It also advises the Government in public finance and monetary regulations. The banks or non-bankinginstitutions shall have to regulate their operations in accordance with, notonly as per the provisions of the Act but also the rules and directionsorinstructions issued by the RBI in exercise of the power thereunder. Chapter3-B expressly deals with regulations of deposit and finance recovered by thernbcs. The directions, therefore, are statutory regulations. " ( 23 ) THE law is, therefore, well settled that the Reserve Bank which isdescribed as bankers' bank is empowered to regulate the banking system andcertain regulatory functions have been assigned to it by the provisions of the Act. "the question now arises as to whether Reserve Bank has exceeded its brief andapplied to the Central Government for an order of moratorium without applicationof mind when there were no good reasons so to do. "the question now arises as to whether Reserve Bank has exceeded its brief andapplied to the Central Government for an order of moratorium without applicationof mind when there were no good reasons so to do. The Central Government dulyconsidered the application made by the Reserve Bank of India and passed ordersof moratorium in terms of Sub-clause (2) of Section 45 of the Act. The record whichhas been produced and the submissions made at the Bar would clearly establish thatthe Reserve Bank of India carefully determined the matter and applied to thecentral Government to accept its opinion on the necessity of moratorium for thereasons as stated by the Reserve Bank of India in its counter-affidavits filed in thiscourt. The Reserve Bank of India possesses the expertise to arrive at its findingwhich cannot be questioned in the present proceedings under Article 226 of theconstitution of India as it will involve examination of facts and figures. There is noevidence of non-application of mind as the matter has been examined in detail bythe Reserve Bank of India as well as by the Central Government. The plea that thefigures as given by the petitioners bear a sound position cannot be accepted as theopinion of the Reserve Bank of India, which is based on cogent evidence on record,cannot be discarded. Similarly, the submissions that the petitioners should havebeen heard before the moratorium was issued cannot be sustained in law as to giveany notice of such a measure would be defeating the whole purpose of moratoriumand this plea has been clearly discarded and over-ruled in matters of urgent natureand the feasibility and practicability of granting hearing and recording of reasonshave been explained in the judgment in Joseph Kuruvilla Vellukunnel (supra) in theparagraphs which have earlier been cited in this judgment. I am in respectfulagreement with the same. ( 24 ) THE judgments as cited by learned Counsel for the petitioners will alsohave no relevance to the facts which arise for consideration in the present petitions. Reliance on the judgment of the Supreme Court in the case of K. I. Shephard and Ors. v. Union of India and Ors. , (1987) 4 Supreme Court Cases 431, by learned Counsel forthe petitioners is misplaced. The Court was dealing with the scheme of amalgamation with regard to the status of employees of the amalgamated bank who wereexcluded from service of the transferee bank while retaining other similarly situatedemployees. v. Union of India and Ors. , (1987) 4 Supreme Court Cases 431, by learned Counsel forthe petitioners is misplaced. The Court was dealing with the scheme of amalgamation with regard to the status of employees of the amalgamated bank who wereexcluded from service of the transferee bank while retaining other similarly situatedemployees. In this background the Court came to the conclusion that rules of naturaljustice were not excluded and an opportunity had to be extended to the employeesintending to be excluded before the scheme was finalised and for that purpose,hearing was considered necessary. Similarly, the other judgments which have beenrendered on general proposition of granting hearing by application of the rules ofnatural justice and fairplay can be of no assistance to the questions which arise forconsideration in the present cases in view of the fact that the principles of naturaljustice can be suitably modified and in exceptional cases they can even be excludedin the larger interest. ( 25 ) THE record has been produced before this Court and the elaborate detailshave also been given in the respective affidavits filed by the respondents. This willindicate that the matter has been examined by respondent No. 2 and it has found"that there is good reason so to do" and as a consequence applied to the Centralgovernment for orders of moratorium in respect of the petitioner banks. Thecentral Government duly considered the application made by the Reserve Bankand made the orders by finding no cogent grounds to differ from the recommendations. It is quite possible that some pleas of the petitioners with regard to thefinancial position of the respective banks may not have been considered withmathematical accuracy but will this Court go into the question of sufficiency orinsufficiency of material to determine the validity of impugned orders. I am afraidthis course is not permissible. The Reserve Bank of India has been assigned certainrole under the Act and this Court does not have the expertise to hold that thedecision taken is without any foundation or basis, particularly, when certainmaterial is already placed on record by the respondents to justify the impugnedaction. ( 26 ) THE law is well settled that the "function of the Court is to see that lawfulauthority is not abused but not to appropriate to itself the task entrusted to thatauthority". ( 26 ) THE law is well settled that the "function of the Court is to see that lawfulauthority is not abused but not to appropriate to itself the task entrusted to thatauthority". The provisions of Section 45 of the Act are substantially complied withand it will not be open for this Court to reappraise the material to arrive at a contraryconclusion as it is not the function of the Courts to sit in judgment over such matters. The plea of mala fide as raised in the petition also has no basis or foundation. Thefear of the petitioner that the Reserve Bank is indulging in this exercise to enable itto pass on the banks to other interested financial institutions cannot be accepted asit has been categorically stated at the Bar by learned Solicitor General that there areno suchplans and a decision has been taken to amalgamate the petitioner banks withoriental Bank of Commerce. ( 27 ) THE learned Counsel for the Intervenors who has appeared for theemployees of the two banks has supported themoratorium orders as well as theproposed amalgamation with Central Bank of Commerce. ( 28 ) THE learned Counsel for the petitioner has lastly contended that thepetitioners may be granted an opportunity to convert themselves into non-bankingcompanies and they will undertake to discharge all their liabilities within threemonths and will protect the interest of all the employees as well. The learnedsolicitor General, on the other hand, has however argued that such an alternativewas offered to the petitioners but they took no concrete steps to convert themselvesand on the contrary rejected the suggestion. The petitioners, in any case, shall havefurther opportunity to represent their case when Reserve Bank of India prepares ascheme of amalgamation and invites objections from them and the transferee bankunder the provisions of Sub-sections (5) and (6) of Section 45 of the Act. The orderof moratorium in each case will run itself out on 31/03/1997 and it will be openfor the petitioner to submit their objections at an appropriate time in accordancewith law including the plea that they may be permitted to apply to convertthemselves into non-banking companies in public interest and in the interest ofdepositors. ( 29 ) IN view of the above, the present petitions have no merit and the sameare dismissed. There will be no order as to costs.