Research › Search › Judgment

Karnataka High Court · body

2014 DIGILAW 859 (KAR)

T. S. Manjunath v. State of Karnataka

2014-09-26

B.S.PATIL

body2014
Judgment : 1. Petitioners are duly elected Directors constituting the Board of Directors of the 2nd respondent - DCC Bank. They have been so elected on 24.05.2014. They have approached this Court challenging order dated 16.08.2014 passed by the Registrar of Co-operative Societies respondent No.3 herein suspending the Board of Directors, exercising power under Sub-Clause 2 of Section 30 of the Karnataka Co-operative Societies Act, 1959 (for short 'the Act') until further orders and appointing the Deputy Commissioner of the district as Administrator. The said order is produced at Annexure-A. This order is challenged on several grounds. 2. First contention urged by the learned Senior counsel for the petitioners is that the order passed is without jurisdiction and without any power or authority. The 2nd contention is that the 3rd respondent failed to provide an opportunity of hearing to the petitioners to put forth their case before passing the impugned order. 3. Elaborating the first contention learned Senior counsel for the petitioners has placed reliance on the second proviso to Section 30(2) of the Act to contend that the 2nd respondent - DCC bank is not given any financial assistance or any guarantee by the State Government, let alone having any Government share holding and therefore, the 3rd respondent -Registrar had no power or authority to supersede or to keep under suspension the Board of the 2nd respondent - Bank. 4. Elaborating the 2nd contention learned counsel for the petitioners submits that show cause notice dated 18.07.2014 was issued by the Joint Registrar of Co-operative Societies, Bangalore Division, Bangalore, informing them about their failure to discharge their duties with responsibility and as to why they should not be made liable for the loss caused to the Bank. They were called upon to show cause within seven days, failing which suitable action as per the provisions of the Karnataka Co-operative Societies Act, 1959 and the Karnataka Co-operative Societies Rules, 1960 would be taken against them. They were also notified that for the loss caused to the Bank due to the irregularities committed, criminal and civil proceedings would be initiated. 5. It is urged by the learned counsel that petitioners were not put on notice with regard to the action sought to be taken against them under Section 30(2) of the Act by superseding or suspending the Board. 5. It is urged by the learned counsel that petitioners were not put on notice with regard to the action sought to be taken against them under Section 30(2) of the Act by superseding or suspending the Board. In other words, his contention that the allegations in the show cause notice were too general and vague and there was no specific notice regarding the proposed action of supersession or suspension of the Board and hence, there was non-compliance of the principles of natural justice. It is also urged that if only the petitioners were notified of the proposed action intended to be taken to supersede/suspend the Board, they would have certainly produced materials, apart from giving detailed reply to show that 3rd respondent had no such power or jurisdiction to supersede the Board because the Bank was not given any loan or financial assistance by the Government nor the Government had any share holding nor had offered any guarantee. It is further contended by him in this connection itself that notice as contemplated under Section 30 of the Act was required to be given by the Registrar, but, in the instant case, notice having been issued by the Joint registrar of Co-operative Societies that too in vague and general terms could not be termed as show cause notice providing fair and reasonable opportunity to the petitioners to have their say in the matter. 6. Learned counsel for the petitioners has placed reliance on the following judgments in support of his contentions: (a) RAJA ANAND BRAHMA SHAH VS. THE STATE OF UTTAR PRADESH AND OTHERS - AIR 1967 SC 1081 (b) M/S. RAZA TEXTILES LIMITED, RAMPUR VS, THE INCOME TAX OFFICER, RAMPUR - AIR 1973 SC 1362 (c) S.L. KAPOOR VS. JAGMOHAN AND OTHERS - AIR 1981 SC 136 (d) COMMISSIONER OF CENTRAL EXCISE VS. BRINDAVAN BEVERAGES (P) LIMITED AND OTHERS - (2007) 5 SCC 388 (e) STATE OF MADHYA PRADESH AND OTHERS VS. SANJAY NAGAYACH AND OTHERS - (2013) 7 SCC 25 7. Learned Additional Government Advocate Smt. S. Susheela appearing for the 3rd respondent Registrar has strongly defended the impugned order. It is contended by her that show cause notice as per Annexure-R7 clearly connotes the intention to take all action under the Act for the irregularities alleged including action under Section 30. Learned Additional Government Advocate Smt. S. Susheela appearing for the 3rd respondent Registrar has strongly defended the impugned order. It is contended by her that show cause notice as per Annexure-R7 clearly connotes the intention to take all action under the Act for the irregularities alleged including action under Section 30. It is urged by her that reply has been given by the petitioners availing the opportunity provided, therefore, the contention urged regarding denial of opportunity to have their say in the matter is untenable. As regards the grant of financial assistance to the respondent Bank, she invites the attention of the Court to the statement of objections filed by the Bank wherein it has admitted the factum of financial assistance given by the State. She draws the attention of the Court to Section 2(a-1-1) of the Act to contend that definition of Assisted Society means, assistance received in the form of guarantee for repayment of loan or interest. 8. It is next contended by the learned Additional Government Advocate that there is an alternative remedy provided under Sec.106(2)(d) of the Act to file an appeal against the impugned order and therefore, petitioners were not justified in approaching this Court directly. 9. In support of her contentions, she has placed reliance on the judgment in the case of JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES VS. P.S.RAJAGOPAL NAIDU AND OTHERS - 1970(1) SCC 753 . 10. Sri D.N. Nanjunda Reddy- learned Senior counsel who appears for the 2nd respondent Bank contends that financial assistance has been indeed given by the State Government, at any rate whether the assistance given amounts to financial assistance or not can be effectively decided by the appellate authority. He invites the attention of the Court to 56th Annual Report for the year 2012-13 of the 2nd respondent Bank to contend that the government financial aid given has been noticed at page No.25 of the report under the head "Capital and Liabilities", particularly, at item "I,M.N". He has urged that the show cause notice issued is not directed against any individual director; it has been addressed against all the members of the Board of Directors, therefore, it has to be understood that the action initiated was for supersession and/or suspension under Section 30. He has urged that the show cause notice issued is not directed against any individual director; it has been addressed against all the members of the Board of Directors, therefore, it has to be understood that the action initiated was for supersession and/or suspension under Section 30. He points out that mere non mentioning of the proviso, action proposed under Section 30 of the Act in the show cause notice cannot be made basis to contend that there was denial of opportunity of hearing. He, therefore, submits that petitioners ought to have filed an appeal availing the statutory remedy provided. 11. Having heard the learned counsel for the parties and on careful perusal of the pleadings and the materials on record, the first question that arises for consideration is, "Whether petitioners can maintain the writ petition despite having an alternative remedy to file an appeal as provided under the Act?" 12. It is well established that where an alternative statutory remedy is provided, this Court will not entertain the writ petition as the aggrieved person will have an effective alternative remedy to seek redressal by filing an appeal. However, where the order under challenge is passed without jurisdiction and / or where the order impugned is passed without following the principles of natural justice, the alternative remedy would not be a bar for this Court to entertain the writ petition. 13. Main contention urged by the petitioners is that there is no power or authority for the 3rd respondent to suspend the Board of Directors. In this regard, it is necessary to refer to Section 30 of the Act which deals with supersession or suspension of the Board. 13. Main contention urged by the petitioners is that there is no power or authority for the 3rd respondent to suspend the Board of Directors. In this regard, it is necessary to refer to Section 30 of the Act which deals with supersession or suspension of the Board. Sub-clauses 1, 2 and 6 which are relevant for our purpose are extracted hereunder: (1) If, in the opinion of the Registrar, the committee,- (a) persistently makes default or is negligent in the performance of the duties imposed on it by this Act, or the rules or the bye-laws; or (b) commits any act which is prejudicial to the interest of the society or its members; or (c) incurs losses for three consecutive years; or (d) has serious financial irregularities or frauds which have been detected; or (e) fails to get its accounts audited for three consecutive years; or (f) against which there are judicial directives to this effect; or (g) is otherwise not functioning properly; or (h) is not functioning in accordance with the provisions of this Act, the rules or bye-laws or any order or direction issued by the State Government or the Registrar including the direction issued under Section 30-B; (2) If in the opinion of the Registrar, the board of a co- operative society:- (i) persistently makes default or is negligent in the performance of the duties imposed on it by this Act, or the rules or the bye-laws; or (ii) commits any act, which is prejudicial to the interest of the society or its members; or (iii) where there is a stalemate in the constitution or functioning of the board; or (iv) has serious financial irregularities or frauds which have been detected; or (v) fails to provide books and record, necessary information and assistance to the election commission to conduct elections to the board within the stipulated time and as a result or otherwise, the election commission has failed to conduct elections to the board within the stipulated time; Registrar, may, after giving the board an opportunity to state objection, if any, by order in writing, supersede or suspend the said board and appoint an administrator to manage the affairs of the society for such period not exceeding six months: Provided that the board of any co-operative society shall not be superseded or kept under suspension where there is no Government share holding or loan or financial assistance or any guarantee by the Government. (emphasis supplied) Provided further that the supersession or suspension of the board of a co-operative bank shall be done only after consultation with the Reserve Bank of India / National Bank as the case may be and the provision of Banking Regulation Act, 1949 shall also apply. (3) ............. (4) ............ (5) ............ (6) Notwithstanding anything contained in this Act, the Registrar shall, in the case of a cooperative bank, if so required in writing by the Reserve Bank of India, in public interest or for preventing the affairs of the co-operative bank being conducted in a manner detrimental to the interest of the depositors or for securing the proper management of the co- operative bank, by order in writing, remove the board of that co-operative bank and appoint an administrator to manage the affairs of the co-operative bank for such period not exceeding one years as may be specified by the Reserve Bank of India. (7) ............. 14. It is clear from the second proviso to Sub-clause 2 of Section 30 of the Act that there is a specific embargo against superseding or suspending the Board where there is no Government share holding or loan or financial assistance or any guarantee by the Government. Sub-clause 2 of Section 30 further makes it clear that the Registrar is enjoined with a duty to give the board an opportunity to state its objections before superseding or suspending it and appointing an administrator. 15. A careful perusal of Sub-clause 2 of Section 30 would indicate that there are three safeguards imposed against the supersession or suspension of the Society. The first being requirement of providing an opportunity to state objection. The second, being in the nature of prohibition stating that if there is no Government shareholding or loan or financial assistance or any guarantee by the Government, no such supersession or suspension shall be resorted to; finally, the third being that supersession or suspension of the Board of the Co-operative Bank shall be done only after consultation with the Reserve Bank of India. 16. As regards opportunity provided by issuing the show cause notice, as can be seen from the show cause notice issued vide Annexure-R7, nowhere there is any indication given in the notice regarding the proposed supersession/suspension of the Board of Directors. 16. As regards opportunity provided by issuing the show cause notice, as can be seen from the show cause notice issued vide Annexure-R7, nowhere there is any indication given in the notice regarding the proposed supersession/suspension of the Board of Directors. The show cause notice does not call upon the directors to have their say against the proposed action of supersession/suspension. The action proposed and the show cause given is in respect of general allegation made regarding several irregularities and illegalities committed in discharge of the duties and functions by the Directors. The proposed action notified to be taken, for which, the directors were called upon to reply, was 'suitable action to be taken under the Act or Rules including civil and criminal proceeding to be initiated'. 17. As it is clear from Sub-clause 2 of Section 30, the Registrar is enjoined with a duty to give the Board an opportunity to state objections in respect of allegations falling under Sub-clauses I to V of Section 30 (2) before by order in writing, superseding or suspending the board and appointing an Administrator. If Sub-clause 2 of Section 30 is read as a whole including the second proviso appended thereto, this makes it clear that the registrar is required to put the directors under notice and call upon them to have their say by filing objections with regard to the allegations contained under Sub- clause 2 of Section 30. Mere satisfaction regarding the irregularities, omission and commission under Sub-clauses 1 and 2 of Section 30 are not enough. The Registrar has to satisfy himself that Bank could be superseded or kept under suspension because it had Government shareholding or loan or financial assistance or any guarantee by the Government. 18. In other words, the Registrar has to satisfy himself that he has power or authority to supersede or suspend the board in terms of the first proviso to Section 30 (2) and further that before resorting to supersession or suspension, he has to consult the Reserve Bank of India. 18. In other words, the Registrar has to satisfy himself that he has power or authority to supersede or suspend the board in terms of the first proviso to Section 30 (2) and further that before resorting to supersession or suspension, he has to consult the Reserve Bank of India. If general allegations are made and petitioners were called upon to give reply without bringing to the notice of the Board of Directors, the action proposed to be taken under Section 30(2) for supersession or suspension of the Board of Directors, it cannot be said that it would amount to a fair and reasonable opportunity given to the Board of Directors to state their objections as mandated under Sub-clause 2 of Section 30, particularly because, the Registrar will have no authority or power to supersede or suspend the Board of Directors, in case it is shown that the 2nd respondent - Bank had no government shareholding that the State Government had not advanced any loan, financial assistance or given any guarantee. This embargo which is in the nature of prohibition to exercise the right of supersession or suspension placed on the Registrar clothes the Bank and the Board of Directors with a corresponding right to state in their objections and place necessary documents for consideration of the Registrar to show that the 2nd respondent - Bank did not have any shareholding of the State Government and that there was no loan, financial assistance or any guarantee by the Government. Had it been so, it will take away the authority of the registrar to proceed with the proposed supersession/suspension of the Board. Unless, the show cause notice mentions the proposed action to be taken regarding supersession/suspension, the directors cannot be expected to state in their objections the factual particulars regarding the shareholding, financial assistance, loan or any guarantee by the Government. 19. In the instant case, the show cause notice is completely silent about it. Hence, it cannot, but, be held that the show cause notice did not provide a fair and reasonable opportunity to the members of the Board of Directors to have their say with regard to the action taken for suspending the board and appointing an administrator. Mere general allegations without referring to the action of supersession or suspension cannot be termed as an opportunity to state objections with regard to the proposed action. 20. Mere general allegations without referring to the action of supersession or suspension cannot be termed as an opportunity to state objections with regard to the proposed action. 20. It is also necessary to state here that when the registrar is required to ascertain the existence or non-existence of certain facts for the purpose of enabling him to exercise his power or authority to supersede or suspend the Board of Directors, he cannot assume the existence of these facts on his own and proceed to exercise his power, because without the jurisdictional facts conferring authority and power being duly ascertained such a power cannot be exercised. The Registrar is required to first record his findings with regard to the existence or non-existence of such jurisdictional facts that confer power on him and for that purpose, he is required to hear the persons who were likely to be effected by providing an opportunity to contend that such facts did not exists, so as to dissuade the authority from exercising the power. The impugned order does not disclose that such procedure has been followed. 21. It is not in dispute that there is no Government shareholding in the 2nd respondent -Bank. It is also not the case canvassed before this Court or forthcoming in the impugned order that any loan was advanced by the State Government. It is contended by the learned Addl. Government Advocate that there is financial assistance and guarantee given by the Government in the form of waiver of interest and guarantee for repayment of interest on the loan advanced by the 2nd respondent through the Primary Co-operative Societies to the farmers. This aspect has been emphatically refuted by the learned counsel for the petitioners contending inter alia, that no financial assistance what so ever was given by the State Government to the 2nd respondent and that the assistance in the form of waiver of interest is to the farmers and not to the petitioners. 22. It is urged by him that, in fact, by virtue of the Loan Waiver Scheme which the State Government wants to enforce through the 2nd respondent - Bank and the Primary Co-operative Societies coming within its ambit, the Bank has been saddled with financial responsibilities and obligations and that there is no assistance what so ever in financial aspects by the Government. He has further pointed out that the Government Financial Aid as mentioned under the head "Capital and Liabilities" in 56th Annual Report for the year 2012-13 of the 2nd respondent - Bank, is not an assistance by the Government, but it is only an amount kept in deposit by the State Government with the bank for the purpose of implementation of the Government Scheme. 23. It is unnecessary for the Court to go into the merits of these contentions regarding the existence or otherwise of any financial assistance by the Government to the 2nd respondent Bank. This involves examination of the factual aspects and appreciation of documents which ought to have been done by the Registrar before passing the impugned order. 24. The Registrar has not undertaken any such exercise, in fact, petitioners have not been provided with any opportunity in this regard to show that there was no financial assistance from the Government or that no guarantee or loan was given by the State Government in favour of the Bank. As these are jurisdictional facts which confer authority on the registrar to exercise his power under Section 30(2) of the Act, unless the registrar records a clear finding on these factual aspects, the action to supersede or suspend the Board of Directors cannot be sustained. 25. In the light of the facts as adverted to above, it is unnecessary to examine the decisions, on which, the learned counsel for the petitioners have relied upon. So far as the judgment relied upon by the learned Addl. Government Advocate in the case of JOINT REGISTRAR OF COOPERATIVE SOCIETIES VS. P.S.RAJAGOPAL NAIDU AND OTHERS, it has to be stated that this is not a case where this Court is interfering with the action taken based on the so called serious consequences on the elected directors on account of the suspension of the board or on the ground that it would be unfair to the new directors or the new members who were elected subsequently to undergo the ordeal of supersession or suspension for the acts committed by the previous board. But this is the case where interference is called for on account of the mandatory requirement which the registrar must fulfill before he acts in the matter of suspension of the board with regard to the existence of financial assistance by way of loan or contribution or shareholding of the State Government. But this is the case where interference is called for on account of the mandatory requirement which the registrar must fulfill before he acts in the matter of suspension of the board with regard to the existence of financial assistance by way of loan or contribution or shareholding of the State Government. Since this mandatory requirement is not addressed by providing opportunity to the directors and by recording legally sustainable reasons in support of the conclusions, interference with the impugned order is called for. Therefore, the decision relied upon by the learned counsel will have no application for the present facts of the case. 26. It cannot be forgotten that allegations against the Board of Directors and others concerned are very serious. The magnitude of the financial irregularity is also very serious. In fact, complaints have been filed and criminal cases are registered against some of the directors and other officials. The matter is under investigation. In such circumstances, the need to provide an opportunity to the petitioners before passing an order suspending the Board of Directors has to be balanced with the need to ensure that expeditious action is taken against the guilty by proceeding in accordance with law. Therefore, this is not a case where petitioners can be allowed to continue as directors without any condition and without placing any time limit for the action to be taken by the Registrar. Therefore, now that petitioners are aware of the action that is proposed against them through the stand that respondents have taken as per their statement of objections, they shall file their objections regarding the proposed supersession/suspension within 15 days from today enclosing such documents as they may deem necessary. The registrar shall consider the same and pass necessary orders recording specific findings about the existence of any financial assistance, loan or guarantee etc., as provided under the second proviso to Sub-clause 2 of Sec. 30 before exercising the power to suspend the Board of Directors or supersede it. In this regard, the petitioners are entitled to place such documents as they deem it necessary to rely for the consideration of the registrar along with their objections. 27. The Registrar shall consider the objections and documents, if any, placed for his perusal and then proceed to pass an order in accordance with law. In this regard, the petitioners are entitled to place such documents as they deem it necessary to rely for the consideration of the registrar along with their objections. 27. The Registrar shall consider the objections and documents, if any, placed for his perusal and then proceed to pass an order in accordance with law. The registrar shall pass an order within the outer limit of two weeks from the date of filing of objections. Till such an order is passed, petitioners shall not take any decision involving any serious financial implication and they shall only attend to such activities that are necessary for the day to day functioning of the bank. 28. In the light of the above, these writ petitions are allowed in part. In terms of the above, the impugned order is set aside. The petitioners are given two weeks to file objections before the registrar. The registrar shall consider the objections and pass appropriate orders within a further period of two weeks thereafter. Until passing of the order by the registrar, the Board of Directors shall not take any major financial decisions and they shall only attend to day to day routine affairs.