Holding

The RBI’s actions – imposing the moratorium, appointing directors, and sanctioning the amalgamation with Federal Bank – were within its statutory powers, justified by good reasons, and not mala‑fide, so the High Court’s order dismissing the writ petitions stands.

Summary

Ganesh Bank, Kurundwad Ltd. incurred large losses in 2004‑05 and the Reserve Bank of India (RBI) imposed a three‑month moratorium on 7 January 2006 under section 45 of the Banking Regulation Act, 1950, appointing two of its own directors to the bank’s board. The RBI then proposed, and the Central Government sanctioned, the amalgamation of the bank with Federal Bank on 24 January 2006. The bank challenged the moratorium, the director appointments, and the amalgamation as ultra‑violet, mala‑fide and without considering better offers. The Supreme Court held that the RBI had sufficient "good reasons" – negative net‑worth, low CRAR, high NPAs and inability to raise fresh capital – to act in the public interest and protect depositors, and that its powers under sections 45 and 36(AB) were correctly exercised. The Court emphasized judicial restraint in reviewing administrative actions and found no illegality, irrationality or procedural impropriety. Consequently, the High Court’s dismissal of the writ petitions was affirmed.

Issues considered

Whether the RBI’s imposition of a moratorium and appointment of directors under the Banking Regulation Act, 1950 was ultra vires or mala‑fide.
Whether the scheme of amalgamation with Federal Bank and its sanction by the Central Government violated the provisions of section 45(1) and related clauses, including the requirement of "good reasons" and adequate opportunity under sections 45(6)‑(7).
Whether the RBI failed to consider other offers and thus acted arbitrarily or with bias.
The scope of judicial review over RBI’s administrative actions – illegality, irrationality, or procedural impropriety.

Legislation cited

Multi-State Cooperative Societies Act, 2002

Subjects

Banking Regulation ActmoratoriumamalgamationRBI powersjudicial reviewadministrative lawpublic interestdepositors protectionultra viresgood reasons

Judgment

GANESH BANK. KURUNDWAD LTD. AND ORS. A
v.
THE UNION OF INDIA AND ORS.

AUGUST 28. 2006

(ARIJIT PASA YAT AND C.K. THAKKER, JJ.] B

Banking Regulation Act, 1950-Sections 45 (/) and 36 (AB)-Bank
incurring huge losses-Imposition of moratorium in respect of Bank by RBI
and order of amalgamation of bank with private sector commercial bank,
within one month of order of moratorium-Correctness of-Held Moratorium C
imposed justified and in terms with public interest under sec/ion 45(/)-
Action of RBI based on negative net worth, risk weighted assets ratio, high
level non-performing assets of the bank and its inability to infi1se fresh
capital-Federal Bank being a strong bank, amalgamation of the bank with
it in interest of depositors and no malafide involved-A/so RBI has necessaiy D
powers to appoint Directors on the Board of the Bank-Thus, order of High
Court not inte1fering with the decision of RBI correct and calls for no
interference-Administrative law.

Administrative law-Judicial inte1ference in administrative mallers-
Scope of-Held: There should be judicial restraint-Where irrelevant aspects E
have been eschewed from consideration, no relevant aspects have been
ignored and administrative decisions have nexus with the facts on record,
there is no scope for inte1ference-ln case of illegality, irrationality, and
procedural impropriety administrative action is subject to control by judicial
review-Test is whether there is any infirmity in the decision making process
and not in the decision itself F
Appellant bank incurred huge losses for the first time in the year 2004-
2005. On 7.01.2006, RBI imposed moratorium in respect of appellant-bank
for three months and duly advertised its decision to take further steps. It
appointed two directors of its own on the Board of Directors of the appellant
bank. RBI then notified the proposed scheme of amalgamating appellant bank G
with Federal Bank, another private sector commercial bank on 9.01.2006 and
the appellant bank filed objections, however, on 24.1.2006, RBI and the Central
Government sanctioned amalgamation of appellant Bank with the Federal
Bank. Appellant Bank filed writ petitions on the ground that the order
437 H
438 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A imposing moratorium and appointing two Directors was ma/a.fide, ultra vires
the power of RBI and Central Government and as such bad in law, illegal and
void; and also the framing of scheme of amalgamation and the decision to
sanction the amalgamation was motivated and pre-planned for the benefit of
the Federal Bank; and that there were no good reasons to impose moratorium
B and the decision to amalgamate was arrived at without considering the
proposals of other banks which were bet!er placed and had made better offers.
High Court dismissed the writ petitions holding that the inference drawn by
RBI was positive and cannot be termed to be perverse; that RBI was warning
the bank for last three years as such it was not possible for High Court to
substitute its judgment for that of RBI, therefore, the decision of the RBI to
C impose the moratorium was neither unjustified nor against the provisions of
section 45(1) of the Banking Regulation Act, 1949. However, it held that the
allegation of malafides was not substantiated. Hence the present appeal.

Dismissing the appeal, the Court

D HELD: I.I. The phrase "good reasons" in sub-section (1) of section 45
of the Banking Regulation Act, 1950 is a term of wide amplitude and it will
not be correct to restrict it only to the actions mentioned under sub-section
(2) of section 45 of the Act. The provision is concerned with preparing a
scheme of reconstruction or amalgamation which would become necessary
where the RBI is satisfied about the existence of any of the four grounds
E mentioned in section 45(4)-public interest; interest of the banking system;
necessary action in the interest of the depositors or with a view to secure
proper management of the bank. Precursor to the framing of the scheme is
the imposition of the moratorium which is provided in sub-sections (1) and
(2) of section 45. Existence of court proceedings, mentiqned in section 45(2),
F would certainly be one of the good reasons to impose moratorium, but that
certainly cannot be the only one. Considering that object of the Act is
protection of the interest of the depositors, such an interpretation of the
concept of "good reasons" will have to be adopted, and not a narrow one.
(451-G-HJ

G t.2. RBI is an expert body to regulate the banking activities. Its action
is a pre-emptive action which it took considering the then financial position
of the appellant Bank and to prevent further difficulties which were likely to
arise. It is not that when there is a run on the bank then only RBI must
intervene or that it must intervene, only when there are good number of court
H proceedings against the concerned bank. The RBI has to take into account
GANESH BANK, KURUNDWAD LTD."· THE UNION OF INDIA 439
~

the totality of the circumstances and has to form its opinion accordingly. A
[452-E-Fl

1.3. Even if two views are possible since the regulating body has arrived
at a conclusion on the basis of the facts and figures before it, and it has pointed
out that it had been warning the appellant Bank for last th,ree years, it will
not be proper for the Courts to substitute their judgment for that of RBI. Thus, B
it cannot be said that the decision of RBI to impose the moratorium was
unjustified or against the provisions of section 45(1) of the Act or was perverse
and calls for interference. (452-G-H; 453-Al
~

1.4. Regarding the appointment of two directors on the Board of
Directors of the appellant Bank, RBI has the necessary power under section c
36(AB) of the Act and, as s~ch it cannot be faulted for appointing the two
directors. (453-A-BI

2.1. The action of the RBI was based on the finding about the negative
net worth and Risk Weighted Assets Ratio (CRAR) of the appellant-Bank,
its inability to infuse fresh capital and the continued existence of a high level D
of non-performing assests of the bank. [454-G-H[

2.2. Under section 45 of the Act, the primary consideration is public
interest. There is an underlying object of acting swiftly and decisively to
protect interests of depositors and ensure public confidence in the banking
•
system. Once such confidence is lost it becomes difficult to revive the E
confidence and the credibility. Thus, the emergent situation which warrants
action with expedition cannot be lost sight of while deciding the legality of
the action. Once it was decided to anialgamate by reason of section 45 of the
Act, the RBI had to move with utmost expedition to identify another bank
prepared to take over the appellant-Bank and keeping in view the principles
governing merger and amalgamation. The factual scenario does not show that
F
there was any undue haste or malajides involved. [455-D-E; 455-C-DJ
... Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and Ors., (1962[
Supp. 3 SCR 632 and Reserve Bank of India and Ors. v. TimP.x Finance and
Investment Co. Ltd and Ors., [1992[ 2 SCC 344, referred to.
G
2.3. When a moratorium was imposed, RBI was duty bound to prepare a
scheme either of reconstruction or of amalgamation under section 45(4) with
any other banking institution. Thus, RBI had to give a scheme. The scheme
was described as a "cut and paste scheme" and of RBl's action as a regulator
in the interest of the depositors was highlighted. Federal Bank had responded
H
<

440 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
c
A immediately and unconditionally. The fact that the appellant-Bank was put
under moratorium was advertised on web site on 7th January 2006 itself. It
is at that stage that Federal Bank promptly gave its proposal on 8th January
2006. It was ready to honour full liabilities of the depositors and did not ask
for any concessions. Therefore, on the basis of a standard scheme, the opinion
of the appellant-Bank was sought on 9th January 2006 with respect to merger
B with Federal Bank. The objection filed by the appellant-Bank was duly
considered. In fact, certain objections were raised and comments of the RBI
on them were forwarded to the Central Government along with the final
recommendations. (454-A-B; 454-F-G; 455-G-H(

c referred
Bari Doab Bank Ltd v. Union of India and Ors .. (19971 6 SCC 417,
to.

2.4. The Federal Banks' strength lay on the fact that it is a strong bank
with huge net worth, large capital funds and huge amount of deposits with
more than adequate CRAR. The offer of Federal Bank was an unconditional
D offer, whereby it proposed to take over the responsibility of any regulatory
forbearance. The reasons given by the Federal Bank to take over the
appellant's Bank were considered cogent reasons and, therefore, RBl's
decision that the proposal received from the Federal Bank was best under the
circumstances and cannot be faulted. The offers received from the other banks
were neither comprehensive nor unconditional. They were not concluded offers,
E since they were both dependent upon a request for due diligence and in certain •
instances regulatory forbearances. Also one Bank's offer was not accepted
as it was itself an ailing bank. (455-E-Fl

3.1. There should be judicial restraint while making judicial review in
F administrative matters. Where irrelevant aspects have been eschewed from
consideration and no relevant aspect has been ignored and the administrative
decisions have nexus with the facts on record, there is no scope for
interference. The duty of the court is to confine itself to the question of
legality; to decide whether the decision making authority exceeded its powers;
..
committed an error of law; committed breach of the rules of natural ju~tice;
G and reached a decision which no reasonable tribunal would have reached or
abused its powers. (456-H; 457-A-B(

3.2. The grounds on which administrative action is subject to control
by judicial review is illegality which means the decision-maker must
understand correctly the law that regulates his decision-making power and
H must give effect to it; irrationality, namely, Wednesbury unreasonableness;
-
- GANESH BANK, KURUNDWAD LTD. v. THE UNION OF INDIA 44 J

and procedural impropriety. The court will be slow to interfere in such matters
relating to administrative functions unless decision is tainted by any
A

vulnerability enumerated above. Whether action falls within any of the
categories has to be established. Mere assertion in that regard would not be
sufficient. [459-C-D]

3.3. To arrive at a decision on "reasonableness" the Court has to find B
out if the administrator has left out relevant factors or taken into account
irrelevant factors. The decision of the administrator must have been within
the four corners of the law, and not one which no sensible person could have
reasonably arrived at, having regard to the principles, and must have been a
bona fide one. The decision could be one of many choices open to the authority C
but it was for that authority to decide upon the choice and not for the Court to
substitute its view. [460-C-Df

3.4. To characterize a decision of the administrator as "irrational" the
Court has to hold, on material, that it is a decision "so outrageous" as to be
in total defiance of logic or moral standards. Adoption of "proportionality" D
into administrative law was left for the future. [461-B-Cf

Union of India and Anr. v. C. Ganayutham, (1997] 7 SCC 463, relied
on.

• Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., KB E
229: All ER 682 and Council ofCivil Service Unions v. Minister for the Civil
Service, [1984] 3 All.ER.935, referred to.

3.5. Administrative action is stated to be referable to broad area of
Governmental activities in which the repositories of power may exercise every
class of statutory function of executive, quasi-legislative and quasi-judicial F
nature.

State of UP. and Ors. v. Renusagar Power Co. and Ors., AIR (1988) SC
1737, relied on.

"Judicial Review of Administrative Action" by Professor De Smith 4th G
Edition pp. 285-287, referred to.

3.6. The present trend of judicial opinion is to restrict the doctrine of
immunity from judicial review to those classes of cases which relate to
deployment of troupes, entering into international treaties, etc. The distinctive
•H
442 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A features of some of these recent cases signify the willingness of the Courts
to assert their power to scrutinize the factual basis upon which discretionary
powers have been exercised. If the power has been exercised on a non-
consideration or non-application of mind to relevant factors, the exercise of
power will be regarded as manifestly erroneous. If a power (whether legislative
B or administrative) is exercised on the basis of facts which do not exist and
which are patently erroneous, such exercise of power will stand vitiated.

Commissioner ofIncome-tax v. Mahindra and Mahindra Ltd, AIR (1984)
SC 1182, relied on.

Council a/Civil Service Unions v. Minister for the Civil Service, 11984)
C 3 All.ER.935 and Padjieldv. Minister ofAgriculture, Fisheries and Food LR,
(1968) AC 997, referred to.

"Applications for Judicial Review, law and Practice" by Grahame
Aldous and John Alder, referred to.
D 3. 7. In essence, the test is to see whether there is any infirmity in the
decision making process and not in the decision itself. Thus, the judgment of
the High Court does not suffer from any infirmity to warrant interference.
(461-C-D]

E Indian Railways Construction Co. ltd v. Ajay Kumar, 120031 4 SCC
579, relied on.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3698 of2006.

From the Judgment and Order dated 5.4.2006 of the High Court of
F Bombay in Writ Petition No. 337/2006.

Raju Ramachandran, Himanshu Gupta and Shivaji M. Jadhav for the
Appellants.

Jaideep Gupta, Dr. A.M. Singhvi, Kuldeep S. Parihar, H.S. Parihar, Kirat
Singh Nagra, Indramili, Deshmukh and Mark D' Souza (for Mis. Suresh A.
G Shroff & Co.) for the Respondents.

The Judgment of the Court was delivered by

ARIJ IT PASAYA T, J. Leave granted.

H The present appeal is directed against the judgment and order dated
GANESHBANK,KURUNDWADLTD.v. THEUN!ONOflNDIA[PASAYAT,J.] 443
5.4.2006 passed by a Division Bench of the Bombay High Court in Writ A
Petition No.337/2006 questioning Notification dated 7th January, 2006 issued
by the Government of India, Ministry of Finance imposing a moratorium in
respect of the appellant-Ganesh Bank ofKurundwad Ltd. (hereinafter referred
to as "Bank") for a period of three months from the date of order upto and
inclusive of 6th April, 2006. Amongst others, the said Bank was directed not B
to grant any loan or advances or incur liability without the permission in
writing of the Reserve Bank of India (in short the 'RBI"). Further, withdrawal
of sums not exceeding Rs. 5,000/- by a Savings Bank or Current Account
holder was permitted with ? further relaxation of amount not exceeding
Rs. I0,000/- or the actual balance whichever is less in the event of certain
difficulties such as medical treatment, higher education and obligatory expenses C
like marriage etc. Challenge was also made to the appointment of two Directors
on the Board of Directors of the Bank.

Further Challenge was made to the Notification dated 9.1.2006 proposing
a scheme of amalgamation of the Bank with Federal Bank, another private
sector commercial bank and to the order dated 24.1.2006 sanctioning D
amalgamation of Bank with Federal Bank.

It is to be noted that along with the said writ petition filed by the Bank,
another writ petition (WP (C) No. 160/2006) was filed by one Mr. Sunil
Mahadev Chavan.
E
The background facts in which the writ petitions were filed are
essentially as follows:

Appellant Bank was founded sometimes in the year 1920 and is having
a banking license given by the RBI. It has some 32 branches situated principally
in districts ofKolhapur and Sangli of Maharashtra and the adjoining Belgaum F
District of Karnataka. It has around 1,75,000 depositors in the rural areas of
these three districts.

It was carrying on its activities smoothly, and it incurred losses only
once and that was in the financial year 2004-05. That was also for the reasons G
which were beyond its control, viz. (i) the value of the government securities,
wherein it had.made deposits, went down, and (ii) the provisioning norms set
up by the RBI were made more stringent by it It was on this background that
it was shocked to receive the order of moratorium in the morning of 8th
January, 2006. It led to unnecessary long queue at its Dadar branch, Mumbai,
though there was no run on the bank any time in the past or even on that H
444 SUPREME COURT REPORTS (2006] SUPP. 5 S.C.R.

A day as such. Thereafter, the issuance of the moratorium and the decision of
the RBI to take further steps was duly advertised. The RBI appointed two
directors of its own on the Board of Directors of the appellant-Bank on 7th
January, 2006. The RBI then notified the proposed scheme of amalgamating
the appellant-Bank with the Federal Bank on 9th January, 2006. The appellant-
B Bank objected to it by filing its objections on 23rd January, 2006, yet a
decision was taken by the RBI and the Central Government on 24th January,
2006 sanctioning amalgamation of the appellant-Bank with the Federal Bank.

An interim order was passed by the High Court in W.P.337/2006 by
which operation of the order dated 24. I .2006 was stayed and status quo was
C directed to be maintained. The order was challenged by the RBI and Federal
Bank before this Court.

By Order dated 30. I .2006 this Court directed that the petitions were to
be heard and decided early by the High Court. However, the interim order was
left undisturbed.
D
Before the High Court the principal submissions of the writ petitioners
were two-fold, namely that the order dated 7th January, 2006 imposing
moratorium and then the order dated 7th January, 2006 appointing two Directors
are both ma/a fide to suit the convenience of Federal Bank, ultra vires the
power of the RBI and the Central Government and, therefore, bad in law, illegal
E and void. Similarly, the other submission of the writ petitioners was that the
subsequent framing of scheme of amalgamation on 9th January, 2006 and the
decision to sanction the amalgamation taken on 24th January, 2006 are
motivated and pre-planned decisions for the benefit of the Federal Bank, ma/a
fide and ultra vires the powers of the Central Government and the RBI. It was
F further submitted that both these decisions are not justified on facts and have
been arrived at without taking into consideration the relevant materials. As
far as the first decision imposing the moratorium is concerned, it was submitted
that there were no good reasons to impose the same and, as far as the
decision to amalgamate is concerned, it was submitted that the said decision
was arrived at without considering the proposals of four other banks which
G were better placed and had made better offers.
As against these submissions of the writ petitioners, the stand of the
RBI and the Central Government was that the Bank was in serious financial
difficulties and therefore, the moratorium had to be imposed. The moratorium
was fully justified on the facts of the case. The decision to amalgamate the
H appellant Bank with the Federal Bank was arrived at in full compliance with
GANESHBANK,KURUNDWADLTD.v. THEUNIONOFINDIA[PASAYAT,J.] 445

the statutory requirements and after considering relevant materials on record A
as well as the suggestions and objections from the appellant-Bank and all
concerned, and after examining the proposals from the four other banks. It
was, therefore, submitted that there is no reason to interfere with the decisions
arrived at by the RBI and the Central Government which essentially were for
benefit of the depositors. It was submitted that the interest of the employees B
was taken care of and the interest of the shareholders obviously came last.

According to the High Court the following two questions were to be
adjudicated:

"(A) Whether the decision dated 7th January, 2006 of the Central
Government imposing moratorium and to appoint two directors was C
ma/a fide, ultra vires the powers of the Central Government and the
RBI, bad in law and void and unjustified on facts?

(B) Whether the notification dated 9th January, 2006 containing the
proposed scheme of amalgamation and the decision to sanction the
amalgamation dated 24th January, 2006 were malajide, ultra vires the D
powers of the Central Government and the RBI and unjustified on
facts?"

Taking note of the factual background the High Court held that the
inference drawn by RBI was a positive inference and cannot be termed to be E
perverse. The High Court felt that it is the discretion of the decision maker
where two views are possible and if the regulatory body arrived at a conclusion
on the basis of facts and figures before it and points out that it has been
warning the Bank for last over three years it will not be proper for the High
Court to substitute its judgment for that of the RBI. Therefore, it was held
that the decision of the RBI to impose the moratorium was neither unjustified F
nor against the provisions of Section 45(1) of the Banking Regulation Act,
1949 (in short the 'Act'). It was noted that the RBI is an expert body to
regulate the banking activities and its judgment based on the factual scenario
cannot be substituted by the High Court, may be because another view of
the matter was possible. The High Court held that the allegation of malafides G
was not substantiated. It was also of the view that while dealing with the
question of ma/a fides, the following questions were also to be dealt with:

"(i) The first one is non-consideration of any scheme for reconstruction
before going for amalgamation.
H
446 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A (ii) The second :s with respect to proposing amalgamation with Federal
Bank on 9th January, 2006 itself.

(iii) The third facet is not considering the proposal of other banks.

(iv) The fourth is in respect to an adequate opportunity under Section
B 45(6) and (7) of the Act."

After considering the rival submissions, the High Court held that the
allegations were ma/a fides and were not established. Accordingly, the writ
petitions were dismissed.

C The stands taken before the High Court were re-iterated by learned
counsel appearing for the appellant and the respondents.

Learned counsel for the appellants submitted that the undue and
unseemly haste with which the order of moratorium dated 7.1.2006 was passed
is a clear indication of ma/a fides. Moreover, full and correct facts were not
D placed by the RBI before the Central Government, in particular, facts regarding
bank balances with the RBI and other banks and cash at hand amounting to
Rs.36.62 crores were not placed before the Central Government. Actual figure
of those liquid assets were Rs.119 crores as against total deposits of
Rs. 217.43 crores which is 55% against required 25% as per RBI norms. This
was indicative of the bank's strong liquidity position. Total assets of the bank
E as on 3 I .3.2005 were Rs.235.44 crores as against total liabilities of Rs.220.45
crores. Therefore, the assets were exceeding the liabilities by Rs.14.99 crores.
Even as on 31.12.2005, the assets were exceeding the liabilities by Rs.17.70
crores. The net loss in the year 2004-05 on which great stress was laid by the
RBI and the Central Government was on account of notional/book entry loss
p with respect to additional provision for Non Performing Assets (in short the
'NPAs') and depreciation in the value of Government securities. In respect of
Urban Cooperative Banks, the RBI has relaxed provisional norms up to 5
years in respect of depreciation in the value of Government securities. However,
the same was denied to the Bank. Majority advances of the banks were given
to !'be priority sector namely Agricultural advances to which Securitisation
G Act is not applicable. Therefore, relaxation was necessary to be given. The
RB I had granted permission to the Bank to open three new Branches after
being satisfied that the Bank was in a sound financial position. Several
awards were given to the Bank for exercising banking services. There was no
complaint from any depositor, customer or shareholder and the Bank has not
H defaulted in payment of taxes or other government dues.
GANESHBANK,KURUNDWADLTD.v. THEUNIONOFINDIA[PASAYAT,J.] 447

When objections were called for by the RBI regarding amalgamation A
within a span of 15 days in January, 2006, out of the total objections received
by RBI, 97.49% of the customers/depositors objected to moratorium and/or
amalgamation of the Bank and have opted for independent entity of the Bank.

The factual scenario indicates that the proposal for amalgamation with
the Federal Bank was circulated and in a pre-determined manner the proposal B
was ultimately approved on 24.1.2006. The draft scheme of amalgamation was
sent to the Central Government to be operative w.e.f. 27.1.2006. When the
appellant-Bank approached the High Court on 24.1.2006 and the copy of the
writ petition was served on the RBI and the Central Government, the Notification
of amalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself so that it could C
be argued before the High Court that the appellant Bank was no longer in
existence on 25.1.2006. The exercise of power under Section 45 of the Act was
done solely for the purpose of favoring the Federal Bank. Though Section
36(AB) of the Act empowers the RBI to appoint Additional Directors there
is no provision which empowers RBI to direct that no decision of the Board
of Directors would be valid unless it is approved by the Directors appointed D
by the RBI.

The entire exercise was pre-conceived under the garb of exercise of
statutory authority. There was a systematic plan to amalgamate the appellant-
Bank with the Federal Bank. The entire proceedings are thus vitiated by
malice in law. The rejection of the proposal of Saraswat Bank is vitiated on E
account of misunderstanding of Section 56(zb) of the Act and on account of
a failure to consider the interest of shareholders whose interest would continue
to be of paramount importance. On account of heavy floods there was temporary
disruption of banking activities and this aspect has not· been considered.
F
The fact that Federal Banks' Board Meeting was preponed from I I .1.2006
to 8.1.2006 is a pointer to the fact that they were very much in know of things
to gain under advantage.

The data given by the RBI relating to some other amalgamation i.e. in
cases of Global Trust Bank and Nedgundi Bank have no relevance as in those G
cases there were large scale complaints of fraud.

In response, learned collnsel for the respondent No.4 i.e. Federal Bank
submitted as follows:

The procedure, process and yardsticks envisaged under Section 45 of H
448 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A the Act for the amalgamation of a financially unviable bank with a stronger
bank, cannot be the same as are applicable to a tender process. It is submitted
that when acting under Section 45 of the Act, the primary consideration must
be of public interest. Under the said provision, the RBI has the statutory duty
and responsibility to act swiftly and decisively to protect interests of depositors
and public confidence in the banking system. In contrast, when awarding a
B tender, it is primarily commercial considerations that must be the selection
process. It is, therefore, submitted that it is in public interest not to interfere
on commercial consideration with a decision made under Section 45 so long
as it safeguards depositors' interests and public confidence in the banking
system in an emergent situation.
c The respondent No.4-Federal Bank is a financially strong bank with
high net worth, large capital funds and huge amount of deposits with more
than adequate capital to Risk Weighted Assets Ratio (in short the 'CRAR').
Its net worth is about Rs.897 crores and its capital is about Rs.85 crores It
has deposits to the tune of Rs. I6,448 crores and its CRAR at I I .34%, exceeds
D the Reserve Bank of India requirement of 9%. It has a very low percentage
of NPA with its Gross NPAs being 5. I 7% and Net NPA being 1.41 %. As of
3 Ist December, 2005 Federal Bank has ~ecorded a profit of Rs. I 74.48 crores.
The contrast on each of these parameters with the appellant-Bank is striking.
On each parameter, the performance of the appellant-Bank is abysmal in
E comparison to Federal Bank.

It is also pertinent to note that Section 45 of the Act does not contemplate
or require the consent of either the transferor or the transferee bank, although
both are given an opportunity to lodge their objections/suggestions to the
draft scheme, before a final decision is taken.
F
It was submitted that Federal Bank was not privy to any information
from RBI regarding the status of the appellant-Bank or any proposal to
impose a moratorium at any time prior to 7. I .2006 when for the first time the
order of moratorium and the RBI's press release was placed on RBI's website.

G It was also submitted that allegations of complicity based on the
advancement of the date of Federal Bank's Board Meeting from I I I .2006 to
8.1.2006 are completely u:ifounded. It was submitted that Federal Bank had
indeed vide its Notice dated 29. 12.2005 originally scheduled the said Board
Meeting for I 1.1.2006 at Kochi, but this date was found to be inconvenient
to several directors. Instead, 8.1.2006 was fouqd to be a more convenient date
H for the meeting, since firstly many of the directors were congregating at Kochi
GANESH BANK, KURUNDWAD LTD. v. THE UNION OF INDIA [PASA YAT,J] 449

for the wedding of the son of one of Directors on that date, and secondly, A
one other director, an NRI was scheduled to attend a meeting at the PMO on
7. 12006. The said director would also have found it convenient to attend the
Board Meeting, if it were to be held on 8. 12006. In view thereof, for bonajide
reasons and in good faith, the said Board meeting was rescheduled for
8. 12006 vide notice dated 4. 1.2006.
B
Certain aspects which have been noted by the High Com1 to dismiss
the appellant's writ petition need to be noted to test how far the conclusions
are correct.

The first is whether there were "good reasons" for the RBI to apply to C
the Central Government for the moratorium which led to the impugned order
dated 24th January, 2006, the concept of "good reasons" contemplated under
Section and as to how the RBI justifies its decision on the basis of the
yardstick applied by it. As far as the appellant bank is concerned, its case
is that it is a small commercial bank and the only year in which it had made
losses was for the financial year 2004-05. That was because of the value of D
the Government securities going down and the provisioning norn1s being
made more stringent by the RBI. According to the RBl's application to the
Central Government, the net worth of the petitioner bank had become negative
and so also CRAR had become negative and was at 5.83.

As against this stand of the RBI, it was pointed out on behalf of the E
appellant-Bank that Annexure-1 to RBI's application under Section 45(1) dated
4th January, 2006 contained the key financial positions of the Bank. Clause
8 thereof dealt with the NPAs. It was pointed that the net NPAs had gone
down from 10.59% to 8.32%. It was also pointed out that the Bank had done
good resource mobilization in the meantime and its paid up capital had gone F
up from Rs.1.52 crore to Rs.1.82 crore.

In para 5 of the letter, the RBI wrote to the Additional Secretary,
Ministry of Finance that infusing fresh capital did not appear to be feasible.
There was reluctance on the part of the shareholders and directors to merge
with the stronger Bank. It was therefore imperative to make immediate G
arrangement to protect the interest of the depositors to merge with another
bank. It is for this purpose that the moratorium was proposed under Section
45(1).

In the counter affidavit filed before the High Court, it was stated on
behalf of RBI that in June 1998, the Chairman of the appellant Bank was H
450 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A advised that old private sector banks having present net worth of Rs.5 lakhs
should attain the level of Rs.50 crores within a period of 3 years On 12th
January, 1999, the appellant -Bank sent the plan to augment resources up to
Rs.20.08 crores over the period of 5 years. As on 31st March, 2002 its net
worth stood at only Rs.6.62 crores and its paid up capital as on 31st March,
2005 was Rs.1.82 crore. It was further stated that as per the Bank's Balance
B Sheet as on 31st March, 2005. it had reported the net loss of Rs.5.97 crores.
In view of the deteriorating financial position. further meetings were held on
12th August, 2005, 26th August, 2005 and 12th September, 2005 to point out
the major concerns of RBI vi:::. low paid up capital of Rs.182 crore, high level
of gross NPAs (18.04%) and net loss ofRs.5.97 crores. On 14th October, 2005
C the bank was asked to submit 3 detailed plan for capital augmentation. It is
on the background that the moratorium was imposed on 7th January, 2006.

Appellants' stand was that since deposits with the Bank were Rs.92
crores, it was irrational to insist that it should have capital funds of Rs.50
crores. It was however pointed out that the Bank has consistently increased
D its capital and it stood at Rs.2.95 crores by 5th January, 2006 which included
Rs.1.13 crore in the fonn of share application money. It was nothing but a part
of share capital. Again, as far as NP As are concerned, they had gone down
from 14.10% to 9% and, as far as loss of Rs.5.97 crores is concerned, it is
because of the change in the provisioning norms.

E High Court noted that the Bank had paid up capital of Rs.1.82 crores
only, high gross NPAs at 18.04% and net loss of Rs.3.97 crores. It was in
these circumstances that the RBI had to decide as to whether the depositors
of the Bank required any protection. RBI had been monitoring the financial
position of the Bank since June 1998 and since December 2003 the Bank had
F been placed under monthly monitoring as provided under Section 27 of the
Act. According to High Court, expression "good reasons" under Section
45(1 ), primarily relates to interest of the depositors and the interest of the
Bank. This is because the primary objective of the Act is protection of the
interest of depositors as against the primary objective of the Company Law
which is to safeguard the interest of shareholders. This is what is specifically
G stated in the Objects and Reasons of the Act. On these facts, the RBI was
of the view that an apprcpriate action was necessary. It could not be said that
the decision was lacking in the absence of good reasons. It is difficult to say
that it was taken for the benefit of the Federal Bank since these reasons go
back to December 2003 when Federal Bank was not in picture.
H
GANESHBANK,KURUNDWADLTD.1'. THEUNIONOFINDIA(PASAYAT,J.] 45]

It has been submitted that a small bank like the appellant cannot be A
expected to have the Capital Adequacy of Rs.50 crores as advised in June
1998 and which was later on revised to Rs.300 crores by circular dated 20th
February 2004. Reference is made to Section 11 (3)(i) of the Act which provides
that if a banking company has places of its business in more than one State,
it is required to have the aggregaty value of its paid-up capital and reserves B
at not less than Rs.5 lakhs. If that is the expectation, the RBI cannot insist
on the requirement of Rs.50 crores and then go on increasing it further.
Reliance is placed on the decision of this Court in Assam Co. ltd. v. State
ofAssam, (200I] 4 SCC 202, which lays down that a delegate cannot over-ride
the Act either by exceeding the authority or by making provision which is
inconsistent with the Act. On the other hand, stand of RBI is that the C
language of Section l 1(3)(i) is that in the case of such a banking company,
the aggregate value of paid-up capital and reserves shall not be less than Rs.5
lakhs. Therefore, insistence of Rs.50 crores or a higher amount cannot be said
to be erroneous. With globalisation, finance and banking in rural areas .also
have to improve and it is from that point of view that the RBI had expected
the above referred enhancement. That was expected from all similarly situated D
banks and not merely from the appellant-Bank alone. Reference is made to the
expectations under the Basie Committee on Banking Supervision, 1988 and
the first I;Jarasimham Committee Report on Financial System, !991 which
recommended on the basis of the Basie Committee that India also must
conform to the internatioml standards of capital adequacy in a phased manner. E.
Second Narsimham Comrr:ittee. Report on Banking Sector Reforms of 1998 led
RBI to issue guidelines to revise the minimum paid-up capital for the private
sector banks.

The actual scenario shows that when the paid-up capital of the Bank
is so low, namely Rs.1.82 crore, its gross NPAs are at higher level (8.04%), F
its net worth had turned negative and the net _loss is Rs.5.97 crores. There
was nothing wrong on the part of the RBI to expect an appropriate plan of
capital augmentation. The Bank has .not been able to do that and it was quite
likely that it would land into. diffic~lties.

The phrase "good reasons" in sub-section (I) of Section 45 is a term G
of wide amplitude and it will not be correct to restrict it only to the actions
mentioned under sub-section (2) of Section 45 of the Act as is contended by
the appellant. The provision is concerned with preparing a scheme of
reconstruction or amalgamation which would become necessary where the
RBI is satisfied about the ex~tence of any of the four grounds mentioned in H
t
452 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A Section 45(4). Apart from public interest and the interest of the banking
system, which are provided in sub-clauses (a) and (d) thereof, Section 45(4)
provides for the necessary action in the interest of the depositors or with a
view to secure proper management of the bank which are grounds (b) and (c)
in that sub-section. Precursor to the framing of the scheme is the imposition
B of the moratorium which is provided in sub-sections (I) and (2) of Section 45.
Existence of court proceedings, mentioned in section 45(2), would certainly
be one of the good reasons to impose moratorium, but that certainly cannot
be the only one. Considering that object of the Act is protection of the
interest of the depositors, such an interpretation of the concept of "good
reasons" will have to be adopted, and not a narrow one.
c It has been contended that there was a negative impact when moratorium
was imposed, and there were long queues at four branches of the appellant
Bank on 8th January 2006. The RBI arranged to send an amount of Rs.2 crores
to the Bank from its Current Account to meet the depositors' demands. The
manager of the Appellant Bank's branch at Dadar has made an affidavit to
D state that he had not asked for an amount of Rs.2 crores and yet it was sent
by RBI. The branch manager has further stated that depositors were unhappy
with the decision of RBI. These are all disputed questions as rightly noted
by the High Court. As far as the views of the depositors are concerned, they
are bound to vary from person to person and no definite conclusion can be
E drawn merely on the bank manager's affidavit that people were angry against
RBI. Besides, no depositor has questioned legality of the action. It can be
said that the action of the RBI is a pre-emptive action which it took considering
the then financial position of the appellant Bank and to prevent further
difficulties which were likely. It is not that when there is a run on the bank
then only RBI must intervene or that it must intervene only when there are
F good number of court proceedings against the concerned bank. The RBI has
to take into account the totality of the circumstances and has to form its
opinion accordingly.

The ultimate question is whether the inference drawn by the RBI is a
possible inference or is something which can be said to be a perverse one.
G Even if two views are possible since the regulating body has arrived at a
conclusion on the basis of the facts and figures before it, and it has pointed
out that it has been warning the appellant Bank for last over 3 years, it will
not be proper for the Courts to substitute their judgment for that of RBI. In
the circumstances, it cannot hold that the decision of RBI to impose the
H moratorium was unjustified or against the provisions of section 45(1) or such
GANESHBANK,KURUNDWADLTD v. THEUNIONOFINDIA(PASAYAT,J.] 453
that one can call it a perverse one and interfere with it. The RBI is an expert A
body to regulate the banking activities. The moratorium has been challenged
on the ground of malafides also. This challenge along with the challenge to
ama.lgamation also on the basis of malafides needs to be considered.

As far as the challenge to the appointment of two directors on the
Board of Directors of the appellant Bank is concerned, the RBI has the. B
necessary power under Section 36AB of the Act. In the circumstances, it
cannot be faulted for appointing the two directors.

That brings into focus the question as to whether the decision of RBI
to recommend a scheme for amalgamation on 9th January 2006 and the C
decision of the Government to sanction the amalgamation on 24th January
2006 could be said to be ma/a fide or bad in law. As far as this question is
concerned, it contains many sub-questions which are as follows:-

(i) The first one is non-consideration of any scheme for reconstruction
before going for amalgamation.
D
(ii) The second is with respect to proposing.amalgamation with Federal
Bank on 9th January 2006 itself.

(iii) The third facet is not considering the proposal of four other
banks.
E
(iv) The fourth is with respect to an adequate opportunity under
Section 45(6) and (7) of the Act.

Now, as far as the first two questions of non-consideration of
reconstruction and proposing merger with Federal Bank, the RBI has noted
that the Bank was in difficulties from 1990 and particularly from December F
2003 when it was placed under monthly monitoring. RBI in its application for
moratorium to the Central Government dated 4th January 2006 had clearly
stated that during the discussion with the appellant-Bank, major shareholders
and directors had shown total reluctance to merge into the stronger bank. In
view thereof, it was imperative that immediate arrangement to protect the G
interest of the depositors was to be made through its merger with a bank
under Section 45 of the Act. RBI had, therefore, made an effort and called
upon the appellant-Bank, that if possible, to explore the possibility of merger
with another stronger bank. It had also made an effort to impress that there
should be infusion of fresh capital. That was not coming. There could be a
reconstruction by bringing in more money or by narrowing the size of the H
454 SUPREME COURT REPORTS (2006) SUPP. 5 S.C.R.

A appellant-Bank which did not appear to be feasible. The only option left was
that of amalgamation.

When a moratorium is imposed, RBI was duty bound to prepare a
scheme either of reconstruction or of amalgamation under Section 45(4) with
any other banking institution. Thus, RBI had to give a scheme. Federal Bank
B had responded immediately and unco:iditionally. The fact that the appellant-
Bank was put under moratorium was advertised on web site on 7th January
2006 itself. It is at that stage that Federal Bank promptly gave its proposal
on 8th January 2006. The Federal Bank gave three reasons in its letter to RBI
which were as follows:-
c (i) Ganesh Bank of Kurundwad Ltd. has 32 branches situated in
Western Maharashtra and Belgaum area ofKaranataka. Our presence
in this area is very minimal and adding up of the branches of Gimesh
Bank of Kurundwad Ltd. will enable us to have significant presence
in the area.
D (ii) Ganesh Bank of Kurundwad Ltd. has most of the branches in the
agricultural heartland which would enable us to augment our credit
. disbursal to agricultural sector.

(iii). Small size of Ganesh Bank of Kurundwad Ltd. ensures that there
will not be any difficulty in the merger process between our ban,!\ and
E . '
them.

Thereafter it stated as follows:-

We also inform our unconditional acceptance to make full payment to
depositors and that we will not demand any regulatory forbearance."
F
Thus, the Federal Bank was ready to honour full liabilities of the
depositors and did not ask for any concessions. Therefore, on the basis of
a standard scheme, the opinion of the appellant-Bank was sought on 9th
January 2006 with respect to merger in Federal Bank. The scheme was described
G as a "cut and paste scheme" and of RBI's action as a regulator in the interest
of the depositors was highlighted.

It appears that the action of the RBI was based on the finding about
the negative net worth and CRAR of the Appellant-Bank, its inability to
infuse fresh capital and the continued existence of a high level of NP As. It
H has been rightly pointed out that once it was decided to amalgamate by
GANESHBANK,KURUNDWADLTD.". THEUNIONOFINDIA[PASAYAT,J.] 455

reason of Section 45 of the Act, the RBI had to move with utmost expedition. A
This is of paramount importance to prevent erosion of the confidence of the
depositors. Once. such confidence is lost it becomes difficult to revive the
confidence and the credibility.

This Court had occasion to deal with need for expedition in Joseph
Kuruvilla Vellukunnel v. Reserve Bank ofIndia and Ors., [1962] Supp. 3 SCR B
632 and Reserve Bank ofIndia and Ors. v. Timex Finance and Investment Co.
Ltd. and Ors., [ 1992] 2 SCC 344. It is not ih dispute that there were long
queues and on 8.1.2006 the one branch of the appellant-Bank actually faced
cash shortage and had to draw its funds with the RBI protecting the interest
of the depositors because during such period there are severe restrictions on C
the ability of the depositors to operate their bank accounts. Therefore, with

- a view to protect the interest of the depositors, the RBI has to act expeditiously
to identify another bank prepared to take over the appellant-Bank and keeping
in view the background principles governing merger and amalgamation RBI
had to act with expedition. The factual scenario does not show that there was
any ~ndue haste or ma/a fides involved. D
Under Section 45 of the Act, the primary consideration is public interest.
There is an underlying object of acting swiftly and decisively to protect
interests of depositors and ensure public confidence in the banking system.
The emergent situation which warrants action with expedition cannot be lost
sight of while deciding the legality of the action. E
It is brought on record that Federal Banks' strength lay on the fact that
it i~ a strong bank with huge net worth, large capital funds and huge amount
of deposits with more than adequate CRAR. Its. net worth is about Rs.897
crores, capital is around Rs.85 crores, and deposits to the tune of Rs.16,448 F
crores. Its CRAR (11.34%) exceeds the RBI requirement (9%) and percentage
«;if NPAs (Gross and Net) is (5.17% and 1.41 % respectively). For the accounting
period ending 3 lst December, 2005 its profit is Rs.174 Crores.

As observed by this Court in Bari Doab Bank Ltd. v. Unioa of India
and Ors., [1997] 6 sec 417 the provisions of Section 45 of the Act provide G
adequate opportunity of a representation and no additional opportunity is
required to be given. The objection filed by the appellant-Bank was duly
considered. In fact, certain objections were raised and comments of the RBI
on them were forwarded to the Central Government along with the final
recommendations. The RBI was of the view that the proposal received from
the Federal Bank was best under the circumstances and, therefore, the same H
456 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A appears to have been accepted.
At this juncture it is to be noted that offer of Federal Bank was an
unconditional offer, whereby it proposed to take over the responsibility of
any regulatory forbearance. Three reasons given by the Federal Bank to take
over the appellant's Bank were considered cogent reasons and, therefore,
B RBl's decision cannot be faulted. As rightly contended the offers received
from the City Bank, Standard Chartered Bank were neither comprehensive nor
unconditional. In fact, they were not concluded offers, since they were both
dependent upon a request for due diligence and in certain instances regulatory
forbearances. Ratnakar Bank's offer was not accepted as it was itself an ailing
C bank.

Learned counsel for the appellants has highlighted that Saraswat Bank's
offer was an equally good offer if not better and should have been accepted.
It has been pointed out by learned counsel for the respondents that Saraswat
Bank is a Multi State Co-operative Bank and its functioning is governed by
D Multi State Cooperative Societies Act, 2002 (in short '2002 Act'). The legal
opinion available to the RBI was that it was not feasible or permissible to
amalgamate a commercial bank with a cooperative Bank by reason of the
provisions of the Act as well as 2002 Act. The RBI was of the view that such
amalgamation is not possible under Sections 17 and 18 of the 2002 Act as also
Section 56 (zb) of the Act. It was pointed out that Saraswat Bank cannot be
E considered to be a banking company for the purpose of Section 45(4) to
45(15) of the Act. In order to be a banking company within the meaning of
the Act, the entity in question must be a company. Section 56(zb) of the Act
excludes the applicability of Section 45(4) to 45(15) so far as cooperative
banks are concerned. It was pointed out that even if it is conceded for the
F sake of argument that legally amalgamation is permissible it could have taken
a very long time to get requisite clearance from several other agencies under
the 2002 Act and could not have gone through expeditiously. It is also
pointed out that an amalgamation of Multi State Cooperative Bank is subject
to far less regulatory control of the RBI especially in relation to non banking
matters. There is no dispute that the application made by Saraswat Bank was
G duly considered by the RBI.
The scope of Judicial review in administrative matters has been the
subject matter of consideration before this Court in several cases.

There should be judicial restraint while making judicial review in
H administrative matters. Where irrelevant aspects have been eschewed from
GANESHBANK,KURUNDWADLTD.1·. THEUNIONOFINDIA[PASAYAT,J.] 457
consideration and no relevant aspect has been ignored and the administrative A
decisions have nexus with the facts on record, there is no scope for
interference. The duty of the court is (a) to confine itself to the question of
legality; (b) to decide whether the decision making authority exceeded its
powers (c) committed an error of law (d) committed breach of the rules of
natural justice and (e) reached a decision which no reasonable Tribunal wou Id B
have reached or (f) abused its powers. Administrative action is subject to
control by judicial review in the following manner:

(i) Illegality: This means the decision-maker must understand
....' correctly the law that regulates his decision-making power
and must giv~ effect to it. C
(ii) Irrationality, namely, Wednesbury unreasonableness.

(iii) Procedural impropriety.

One of the points that falls for determination is the scope for judicial
interference in matters of administrative decisions. Administrative action is D
stated to be referable to broad area of Governmental activities in which the
repositories of power may exercise every class of statutory function of
executive, quasi-legislative and quasi-judicial nature. It is trite law that exercise
of power, whether legislative or administrative, will be set aside if there is
manifest error in the exercise of such power or the exercise of the power is E
manifestly (!rbitrary (See State of U.P. and Ors. v. Renusagar Power Co. and
Ors., AIR (1988) SC 1737). At one time, the traditional view in England was
that the executive was not answerable where its action was attributaLle to the
exercise of prerogative power. Professor De Smith in his classical work "Judicial
Review of Administrative Action" 4th Edition at pages 285-287 states the
legal position in his own terse language that the relevant principles formulated F
by the Courts may be broadly summarized as follows. The authority in which
discretion is vested can be compelled to exercise that discretion, but not to
. exercise it in any particular manner. In general, discretion must be exercised
only by the authority to which it is committed. That authority must genuinely
address itself to the matter before it; it must not act un<ler the dictates of
another body or disable itself from exercising discretion in each individual G
case. In the purported exercise of its discretion, it must not do what it has
been forbidden to do, nor must it do what it has not been authorized to do.
It must act in good faith, must have regard to all relevant considerations and
must not be influenced by irrelevant considerations, must not seek to promote
purposes alien to the letter or to the spirit of the legislation that gives it power H
458 SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.

A to ac.:t, and must not act arbitrarily or capriciously. These several principles
can conveniently be grouped in two main categories: (i) failure to exercise a
discretion, and (ii) excess or abuse of discretionary power. The two classes
are not, however, mutually exclusive. Thus, discretion may be improperly
fettered because irrelevant considerations have been taken into account. and
B where an authority hands over its discretion to another body it acts ultra
vires.

The present trend of judicial opm1on is to restrict the doctrine of
immunity from judicial review to those classes of cases which relate to
deployment of troupes, entering into international treaties, etc. The distinctive
C features of some of these recent cases signify the willingness of the Courts
to assert their power to scrutinize the factual basis upon which discretionary
powers have been exercised. One can conveniently classify under three heads
the grounds on which administrative action is subject to control by judicial
review. The first ground is 'illegality', the second 'irrationality', and the third
'procedural impropriety'. These principles were highlighted by Lord Diplock
D in Council of Civil Service Unions v. Minister for the Civil Service, [1984]
3 All.ER.935, (Commonly known as CCSU Case). If the power has been
exercised on a non-consideration or non-application of mind to relevant
factors, the exercise of power will be regarded as manifestly erroneous. If a
power (whether legislative or administrative) is exercised on the basis of facts
E which do not exist and which are patently erroneous, such exercise of power
will stand vitiated. (See Commissioner of Income-tax v. Mahindra and
Mahindra Ltd, AIR (1984) SC 1182. The effect of several decisions on the
question of jurisdiction has been summed up by Grahame Aldous and John
Alder in their book "Applications for Judicial Review, Law and Practice" thus:

F "There is a general presumption against ousting the jurisdiction
of the courts, so that statutory provisions which purport to exclude
judicial review are construed restrictively. There are, however, certain
areas of governmental activity, national security being the paradigm,
which the courts regard themselves as incompetent to investigate,
..
beyond an initial decision as to whether the government's claim is
G bona fide. in this kind of non-justiciable area judicial review is not
entirely excluded, but very limited. It has also been said that powers
conferred by the Royal Prerogative are inherently unreviewable but
since the speeches of the House of Lords in Council of Civil Service
Unions v. Minister for the civil Service this is doubtful. Lords Diplock,
Scaman and Roskili appeared to agree that there is no general distinction
H
GANESH BANK. i<URUNDWAD LTD. v. THE UNION OFINDIA [PASAYAT,J.J 459

between powers, based upon whether their source is statutory or A
prerogative but that judicial review can be limited by the subject
matter of a particular power, in that" case national security. May
prerogative powers are in fact concerned with sensitive, non-justiciable
areas, for example, foreign affairs, but some are reviewable in principle,
including the prerogatives relating to the civil service where national B
security is not involved. Another non-justiciable power is the Attorney
General's prerogative to decide whether to institute legal proceedings
on behalf of the public interest."

(Also see Padfield v. Minister of Agriculture, Fisheries and Food, (LR
(1968) AC 997).
c
The court will be slow to interfere in such matters relating to
administrative functions unless decision is tainted by any vulnerabiiity
enumerated above; like illegality, irrationality and procedural impropriety.
Whether action falls within any of the categories has to be established. Mere
assertion in that regard would not be sufficient. D
The famous case. commonly known as "The Wednesbury's case" is
treated as the landmark so far as laying down various basic principles relating
to judicial review of administrative or statutory direction.

Before summarizing the substance of the principles laid down therein E
we shall refer to the passage from the judgment of Lord Greene in Associated
Provincial Picture Houses Ltd. v. Wednesbury Corpn. (KB, at p. 229: All ER
p. 682). It reads as follows:
,.
" ...... .It is true that discretion must be exercised reasonably. Now what
does that mean? Lawyers familiar with the phraseology used in relation F
to exercise of statutory discretions often use the word 'unreasonable'
in a rather comprehensive sense. It has frequently been used and is
frequently used as a general description of the things that must not
be done. For instance, a person entrusted with a discretion must, so
to speak, direct himself properly in law. He must call his own attention G
to the matters which he is bound to consider. He must exclude from
his consideration matters which are irrelevant to what he has to
consider. If he does not obey those rules, he may truly be said, and
often is said, to be acting 'unreasonably'. Similarly, there may be
something so absurd that no sensible person could even dream that
it lay within the powers of the authority .... In another words, it is H
460 SUPREME COURT REPORTS [2006) SUPP. 5 S.C.R.

A taking into consideration extraneous matters. It is unreasonable that
it might almost be described as being done in bad faith; and in fact,
all these things run into one another."

Lord Greene also observed (KB p. 230: All ER p.683)

B " ..... it must be proved to be unreasonable in the sense that the
court considers it to be a decision that no reasonable body can come
to. It is not what the court considers unreasonable. The effect of the
legislation is not to set up the court as an arbiter of the correctness
of one view over another." (emphasis supplied)

C Therefore, to arrive at a decision on "reasonableness" the Court has to
find out ifthe administrator has left out relevant factors or taken into account
irrelevant factors. The decision of the administrator must have been within the
four comers of the law, and not one which no sensible person could have
reasonably arrived at, having regard to the above principles, and must have
been a bona fide one. The decision cou Id be one of rriany choices open to
D the authority but it was for that authority to decide upon the choice and not
for the Court to substitute its view.

The principles of judicial review of administrative action were further
summarized in 1985 by Lord Diplock in CCSU case as illegality, procedural
E impropriety and irrationalit:r. He said more grounds could in future become
available, including the doctrine of proportionality which was a principle
followed by certain other members of the European Economic Community.
Lord Diplock observed in that case as follows:

" .... .Judicial review has I think, developed to a stage today when,
F without reiterating any analysis of the steps by which the development
has come about, one can conveniently classify under three heads the
grounds on which administrative action is subject to control by judicial
review. The first ground I would call 'illegality', the second 'irrationality'
and the third 'procedural impropriety'. That is not to say that further
development on a case by case basis may not in course of time add
G further grounds. I have in mind particularly the possible adoption in
the future of the principle of 'proportionality' which is recognized in
the administrative law of several of our fellow members of the European
Economic Community."

Lord Diplock explained "irrationality" as follows:
H
GANESHBANK,KURUNDWADLTD.1·. THEUNIONOFINDIA[PASAYAT,J.] 461
"By 'irrationality' I mean what can by now be succinctly referred A
to as Wednesbury unreasonableness'. It applies to a decision which
is to outrageous in its defiance of logic or of accepted moral standards
that no sensible person who had applied his mind to the question to
be decided could have arrived at it."

In other words, to characterize a decision of the administrator as B
"irrational" the Court has to hold, on material, that it is a decision "so
outrageous" as to be in total defiance of logic or moral standards. Adoption
of "proportionality" into administrative law was left for the future.

These principles have been noted in aforesaid terms in Union of India
and Anr. v. C. Ganayutham, [ 1997] 7 SCC 463. In essence, the test is to see C
whether there is any infirmity in the decision making process and not in the
decision itself. (See Indian Railways Construction Co. Ltd. v. Ajay Kumar,
[2003J 4 sec 579).

Looked at from the aforesaid angle, the judgment of the High Court D
does not suffer from any infirmity to warrant interference. The appeal is
dismissed.

NJ. Appeal dismissed.