Supreme Court of India
INDIAN BANKversusGODHARA NAGRIK COOPERATIVE CREDIT SOCIETY LTD. AND ANOTHER
- Citation
- 2008 INSC 717
- Decided
- 16 May 2008
- Disposal
- Case Partly allowed
- Bench
- S B SINHA
Holding
A writ court may not intervene in a private contract dispute unless the State action is arbitrary or unreasonable; however, public‑sector banks are constructively liable for the acts of their employees and must pay undisputed fixed‑deposit amounts.
Summary
The cooperative societies had placed fixed deposits with Indian Bank and Bank of Baroda through commission agents, and the banks later refused to honour the deposits, claiming the amounts had been used to grant loans and that a fraud involving bank officers had occurred. The societies filed writ petitions under Articles 12 and 226 seeking payment of the matured deposits; the Gujarat High Court, despite noting serious disputed questions of fact, constituted a Committee under Section 35A of the Banking Regulations Act to investigate and directed the banks to pay the undisputed amounts. The banks appealed, arguing that the writ court should not have entertained a private contract dispute and that the Committee’s findings were inconclusive. The Supreme Court held that while public‑sector banks are ‘State’ entities and writs are maintainable, the High Court should not have intervened in matters involving serious factual disputes unless the bank’s action was arbitrary, which it was not. However, the Court recognized the banks’ constructive liability for the acts of their employees and directed them to release the undisputed amounts to the cooperative societies, subject to safeguards, and to expedite the pending criminal proceedings. The appeals were partly allowed with these directions.
Issues considered
- Whether writ petitions against public‑sector banks are maintainable under Articles 12 and 226 of the Constitution
- Whether a writ court can entertain a private contract dispute involving serious disputed questions of fact
- Whether the High Court could validly direct the constitution of a Committee under Section 35A of the Banking Regulations Act
- Whether the banks are constructively liable for fraudulent acts of their officers
- Whether the banks must pay the matured fixed‑deposit amounts despite the alleged fraud
Legislation cited
- Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
- Banking Regulations Act, 1949s. 35A
- Constitution of Indias. Article 12, s. Article 226
Subjects
fixed depositspublic sector bankswrit jurisdictionArticle 12Article 226constructive liabilityfraudpublic interest litigationBanking Regulations Actcontract enforcementCommitteeCBIcooperative societies
Judgment
(2008] 9 S.C.R. 450
A INDIAN BANK
v.
GODHARA NAGRIK COOPERATIVE CREDIT
SOCIETY LTD. AND ANOTHER
(Civil Appeal No. 3303 of 2005)
B MAY 16, 2008
[S.B. SINHA AND LOKESHWAR SINGH PANTA, JJ.]
CONSTITUTION OF IND/A, 1950:
C Articles 12 and 226 - Disputes relating to payment of
amounts of Fixed Deposits with Banks - Writ petitions - Main-
tainability of - HELD: In matters of enforcement of contracts,
Public Sector Banks are governed by terms of contract - Mat-
ter involves various disputed questions - Role played by writ
D petitioners is also in issue - Such seriously disputed ques-
tions of fact could not have been gone into by writ court- Pub-
lic Interest Litigation.
BANKING:
E Amounts deposited with Banks under FDRs - Deposi-
tors claiming payment of amounts on maturity - Bank refus-
ing payment on ground that fraud was committed by deposi-
tors and Bank employees - HELD: Bank cannot refuse to
accede to just demand of investors to pay any amount law-
F fully due to them on the premise that their officers are guilty of
commission of fraud - Employers would be constructively li-
able for acts of negligence on part of their employees - Keep-
ing in view circumstances of the case, directions issued for
release of amounts on conditions as mentioned in judgment
G -Negligence - Constructive liability of employer - Constitu-
tion of India, 1950 - Articles 12 and 226.
The respondent Co-operative Societies made fixed
deposits with the appellant Banks wherefor Fixed Deposit
Receipts (FDRs) were to be issued. Loans were granted
H 450
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 451
CREDIT SOCIETY LTD. & ANR.
to various persons on the basis of the said FDRs. On A
maturity of the FDRs, the investors sought its
encashment, but the banks declined stating that the
amounts under the FDRs had already been paid by way
of loans and no further amount was payable. It was stated
that a fraud on the banks was practised to which the de- B
positors and the officers of the Banks were parties. In the
writ petitions filed by the depositors, though the High
Court opined that serious disputed questions of fact be-
ing involved in the writ petition no relief could be granted
to the writ petitioners, it, however, relying upon the provi- c
sions of s.35A of the Banking Regulations Act, 1949, di-
rected a Committee to be constituted under the Chairman-
ship of the Deputy Governor of the Reserve Bank of India
or his nominee to go into the matter in greater details. The
Committee submitted its report stating that principally of- D
ficers of the Banks were involved in the scam. The High
Court, accordingly, opined that the writ petitioners were
not parties to the fraud and as such subject to any orders
that might be passed in the criminal case, the Banks
should pay the amounts under the FDRs to the deposi-
tors. E
In the Instant appeals filed by the Banks it was con-
tended for the appellants that in a writ petition involving
private dispute, no direction for payment of money in
favour of the writ petitioners should have been issued by F
the High Court; that as the writ petitions involved serious
disputed questions of fact, the High Court should not have
entertained the same; and that the Central Bureau of In-
vestigation having submitted a charge-sheet wherein not
only the officers of the banks but also the commission G
agents were found to be guilty of conspiracy in commit-
ting fraud on the banks, the judgment and direction of
the High Court should be set aside.
Partly allowing the appeals, the Court
H
452 SUPREME COURT REPORTS [2008] 9 S.C.R.
A HELD: 1.1 The propositions of law which are undis-
puted are : (i) writ petitions against the banks being 'State'
within the meaning of Article 12 of the Constitution of In-
dia were maintainable; (ii) writ petitions involving serious
disputed questions of fact, ordinarily should not be en-
B tertained although the High Court in some cases may
enter into disputed questions of fact. [Para 10] [459-A,B]
~
1.2 A writ petition indisputably would be maintainable
even in relation to a matter arising out of contract qua
contract. Some cases may start on a private interest but if
c the court finds involvement of a public law element therein
concerning a large number of people, the writ court may
proceed on the basis as if it was public interest litigation
and appoint a Committee and then grant relief in favour
of the writ petitioners. It may be that in appropriate cases,
D the court may find the recommendations made by the
Committee acceptable. But in the instant case, it is not a
public interest litigation in that sense of the term. [para
11-12 and 17-18] (462-8,C, 473-8]
Guruvayoor Devaswom Managing Committee & anr. vs.
E C. K. Rajan & Ors. (2003) 7 SCC 546; Ashok Lanka & anr. vs.
Rishi Dixit &Ors. (2005) 5 SCC 598; and Krishna Swami v.
Union of India and another with Raj Kanwar v. Union of India
and Another (1992) 4 SCC 605 - referred to.
F "The Role of the Judge in Public Law Litigation"by
Abram Chayes, Harv. Law. Rev. Vol. 89 (1976) Pg. 1281 -
referred to.
1.3 A writ court exercising the power of judicial re-
view has a limited jurisdiction. Indisputably, exercise of
G jurisdiction by the High Court is permissible in a case
where action of the State is found to be unfair, unreason-
able or arbitrary. The question which should have been
posed by the High Court was as to whether the action of
the bank was so arbitrary so as to invoke the public law
H jurisdiction. If the answer to the said question was to be
INDIAN BANK v. GODHARA NAG RIK COOPERATIVE 453
CREDIT SOCIETY LTD. & ANR.
in the negative, the High Court should have refused to A
exercise its jurisdiction. [para 16] [470-A,B]
Mis Hyderabad Commercials vs. Indian Bank & Ors. 1991
Supp. (2) SCC 340 - held inapplicable.
L/C of India & anr. vs. Consumer Education & Research B
Centre & ors., (1995) 5 SCC 482; Sanjana M. Wig (Ms) vs.
Hindustan Petroleum Corpn. Ltd. (2005) 8 SCC 242; ABL In-
...I,
ternationa/ Ltd & Anr.. vs. Export Credit Guarantee Corpora-
tion of India Ltd & Ors. (2004) 3 SCC 553; and The D.FO,
South Kheri & ors. vs. Ram Sanehi Singh (1971) 3 SCC 864 c
- referred to.
2.1 Although the Public Sector Banks having regard
to the provisions of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970 should discharge
their functions keeping in mind the larger public interest D
-< but ordinarily in the matter of enforcement of contract, they
are to be governed by the terms thereof, which would not
be amenable to writ jurisdiction of the High Court unless
the actions of the banks are found to be wholly arbitrary
and unreasonable. [para 10] [459~F,G] E
2.2 A fraud has been practiced on the banks. Primary
accused may be the bank officers but a conspiracy with
them by the outsiders has also been alleged. The ques-
tion as to whether fraud has been committed by the offic-
~
ers of the bank is pending consideration before a compe- F
tent criminal court. There are other various disputed ques-
tions which are required to be gone into in the said pro-
ceedings. The role played by some of the writ petitioners-
respondents is also in issue. Such seriously disputed
questions of fact could not have been gone into by the G
writ court. [para 16-17] [470-C, 471-8,C]
3.1 Indisputably, whether as public sector undertak-
ings or otherwise, the banks cannot refuse to accede to
the just demand of the investors to pay any amount law-
H
454 SUPREME COURT REPORTS [2008] 9 S C. R
A fully due to them inter alia on the premise that their offic-
ers are guilty of commission of any fraud. In given cases,
the employers are constructively liable for acts of negli-
gence on the part of their employees. For the purpose of
this case, the Banks would be assumed to be construe-
B tively liable for acts of their employees and, therefore, are
liable to pay the amount under the contract for which the
FDRs were issued. [Para 1O] [460-C,E, 461-F]
Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co Ltd.
[1915] AC 705 HL; Meridian Global Funds Management Asia
c Ltd. v. Securities Commission [1995] 2 AC 500=[1995] 3 All
ER 918 - referred to.
Farrar's Company Law, 4th Edn. Page 147 - referred to.
3.2 The cooperative societies/cooperative banks for
D the purpose of their day-to-day functioning require the
amount which they have invested in FDRs on their matu- .,.
rity. The appellant Banks being 'State' within the meaning
of Article 12 of the Constitution of India with the assis-
tance of officers of the Central Bureau of Investigation
E should make all attempts to ascertain as to which of the
cooperative societies/cooperative banks are in no way
involved with the scam, and subject to such precautions
as may be found necessary to be taken, release the
amount in their favour. [Para 19 and 20] [473-E,F,G, 474-A]
F .:
3.3 In the event, the cooperative society intending to
avail loan facilities for running their business, approach
the banks, the latter may apart from usual conditions,
stipulate a further condition that the amount of FDR would
remain with them and on that basis, loans may be granted
G of such amount. The usual precautions in regard thereto
may also be taken by the Banks. These directions are is-
sued keeping in view the factual scenario obtaining in the
case and that non-release of the amount is likely to en-
sure hardships that may be faced by the cooperative so-
H cieties. These directions should not be treated to be pre-
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 455
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
-<,
cedent. [para 22-23] [474-D,E,F] A
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 3303
•' of 2005
From the Judgment and final Order dated 1/10/2003 of
the High Court of Gujarat at Ahmedabad in l.P.A. No. 258 of B
2000
WITH
C.A. Nos. 3336, 3337, 3338 and 3304-3305 of 2005
P.P. Rao, Ajay Kr. Mishra, Pramod B. Agarwala, Praveena c
Gautam, Darshan Parikh, Nitin Kant Setia, Himanshu Munshi,
N.R. Parikh, Rajesh Kr. Chaurasia and Vikram for the Appel-
lant.
C.A. Sundaram, B.S. Patel, Aniruddha P. Mayee, Rucha
D
Maysee, K.S. Rathod, Abhishek Gupta, Shabu Sreedharan,
B.V. Balaram Das, V. Shekhar, S. Wasim A. Qadri and Gaurav
Agarwal for the Respondents.
The Judgment of the Court was delivered by
E
S.S. SINHA, J. 1. These appeals involve an interesting
question as regards the power of judicial review of a Superior
Court.
2. Respondents herein are cooperative societies regis-
tered under the Cooperative Societies Act and/or their Mem- F
be rs.
They deposited certain amounts in cash in fixed deposits
of Banks wherefor Fixed Deposit Receipts (FDRs) were to be
issued. Such deposits were made through some so-called Com-
mission Agents of the Banks on payment of huge commission G
which is ordinarily not allowed by the Nationalized Banks.
3. Applications for grant of loans by various persons were
filed before the prescribed authorities of the banks on the basis
of the said FDRs. Allegedly a large number of officers of the
H
456 SUPREME COURT REPORTS [2008] 9 S.C.R.
A banks were involved in a scam whereby unofficial investments >
of the said amount were being made.
4. As and when the FDRs matured, the investors requested
the Banks for their encashment. The banks refused to accede
thereto stating that the amount under the FDRs had already been
B paid by way of loans and, thus, no further amount was payable.
It was contended that a fraud on the banks has been practiced
to which the depositors and the officers of the banks were par-
ties.
c 5. Writ petitions were filed. A learned Single Judge of the
High Court opined that serious disputed questions of fact be-
ing involved in the said writ petitions, no relief can be granted to
the writ petitioners.
6. Despite the same, the learned single judge relying on
D the provisions contained in Section 35A of the Banking Regu-
la:ions Act, 1949 directed constitution of a Committee under
the Chairmanship of the Deputy Governor of Reserve Bank of
India or his nominee to go into the matter in great details. Vari-
ous powers were delegated in favour of the Committee includ-
E ing the one that the decision of the Committee shalt be final and
binding upon the parties.
A Division Bench of the said Court in an intra court appeal
preferred thereagainst, however, stayed only the operation of
some of the clauses of the said order. The Committee, how-
F ever, was allowed to function.
A special leave petition filed thereagainst has been dis-
missed by this Court with certain observations.
7. The Committee submitted its report. It was found that
G principally the officers of the banks were involved in the matter
of commission of the alleged fraud on the Banks.
Members of the Committee, however, differed in their opin-
ion as to whether, having regard to the limited scope of the en-
quiry, any positive direction could be issued.
H
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 457
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
8. Relying on and/or on the basis of the report of the Com- A
mittee, the Division Bench of the High Court opined that as the
writ petitioners were not parties to the fraud, subject to any other
or further orders that may be passed in the criminal case, ap-
pellant-banks should be directed to pay the amounts under the
FDRs to the depositors. B
..... 9. Appellants are, therefore, before us .
On 5th April 2004, a limited notice was issued by this Court,
which is to the following effect:-
"Issue notice on the special leave petition limited to the c
question as to whether the High Court should have directed
payment having regard to the fact that the Committee itself
had not finally resolved the question of liability as far as
the disputed amount was concerned.
D
Issue notice on the prayer for interim relief also."
This Court in its order dated 10th December, 2004 ex-
plained the said order stating :-
"The issue which is now required to be resolved is a narrow
one viz. whether the Committee had finally de~ided that
E
the amounts payable by the Bank (a) were the liability of
the Bank and (b) if so, what was the quantum if any, payable
.
(
by the Bank to the deposits. Learned counsel appearing
on behalf of the respondent prays for time till after the
vacation. F
Let the matter appear two weeks after reopening on
a miscellaneous day.
There will be interim order staying the operation of the
impugned order." G
• However, by an order dated 9th May, 2005, upon hearing
the counsel for the parties, 'Leave' was granted, as a result
whereof all the contentions of,.the parties are now open.
10. Mr. P.P. Rao, learned Senior Counsel appearing on H
458 SUPREME COURT REPORTS [2008] 9 S.C.R.
4
A behalf of Bank of Baroda would submit :-
(i) In a writ petition involving private dispute, no direction
for payment of money in favour of the writ petitioners
should have been issued by the High Court;
B (ii) As the writ petitions involved serious disputed
questions of fact, the High Court should not have
entertained the same; ...
(iii) Having regard to the fact that the Central Bureau of
Investigation has since submitted a charge-sheet
c wherein not only the officers of the banks but also the
commission agents have been found to be guilty of
an offence of conspiracy in committing fraud on the
D
bank, the judgment and direction of the High Court
should be set aside.
Mr. Sundaram, learned Senior Counsel, appearing on
..
-
behalf of the respondents, on the other hand, would contend:
(a} Although the writ petitions were filed for enforcement
of a contract, as the same involved public law
E character, the writ petitions were maintainable.
(b) Appellants being 'State' within the meaning of Article
12 of the Constitution of India, they were amenable
to writ jurisdiction of the High Court.
(c) The writ petitions having not been dismissed in 1imine, •'
F
the High Court was entitled to go into the merit of the
matter for the purpose of arriving at a finding as to
whether any case has been made out for issuance
of any writ, direction or order.
G (d) In a case of this nature the High Court is entitled to
convert a private dispute into a public interest
.:
litigation, the same having a public ramification by
appointing a Committee and act thereupon, as a
consequence whereof, relief in favour of the writ
H petitioners/respondents could be granted.
.,
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 459
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
The propositions of law which are undisputed are:- A
i) Writ Petitions against the banks being 'State' within
the meaning of Article 12 of the Constitution of India
were maintainable;
ii) Writ Petitions involving serious disputed questions B
of fact, ordinarily should not be entertained although
~
the High Court in some cases may enter into disputed
questions of fact.
The question, however, is as to whether the learned Single
Judge, despite holding that the writ petitions were not maintain- c
able, could have issued direction for constitution of the Com-
mittee.
The powers and functions delegated to the Committee
were wide, by reason whereof for all intent and purport, even
D
judicial power were delegated.
Let us now consider the question as to whether direction
to constitute such a Committee was legally permissible. Ind is-
putably, the authorities of the Reserve Bank of India in exercise
of their statutory powers conferred upon them under Section E
35A of the Banking Regulation Act could issue directions for
initiating an enquiry into the affairs of the Banks. The Banks
being public sector undertakings could themselves do so and
i' have in fact done so.
It is one thing to say that the Public Sector Banks having F
regard to the provisions of the Banking Companies (Acquisi-
tion and Transfer of Undertakings) Act, 1970 should discharge
their functions keeping in mind the larger public interest but or-
dinarily in the matter of enforcement of contract, they are to be
governed by the te,rms thereof, which would not be amenable to G
writ jurisdiction of the High Court unless the actions of the banks
are found to be wholly arbitrary and unreasonable.
The core question which arises for consideration in the
writ petitions was as to whether, keeping in view the apprehen-
H
460 SUPREME COURT REPORTS (2008] 9 S.C.R.
A sion in the mind of the Bank that it has been subjected to fraud
by its own officers as also the apprehension in their mind that
the writ petitioners or their agents might have conspired with
the offices of the Banks, was it unfair and unreasonable in its
decision to refuse to make payment? The answer to that ques-
B tion prima facie must be rendered in the negative. If, however, it
is found as of fact that the writ petitioners-respondents were not
parties to the fraud, whether even in a lis involving private law ,..
domain, namely, contract qua contract, as a trustee of the in-
vestors' money, they may be held to be liable to refund the
c amount, is the question?.
Indisputably, whether as public sector undertakings or oth-
erwise the banks cannot refuse to accede to the just demand of
the investors to pay any amount lawfully due to them inter alia
on the premise that their officers are guilty of commission of
D any fraud.
)
It is one thing to say that fraud has been committed by
their officers to cause wrongful loss to the bank but it is another
thing to say that the banks are constructively liable for the acts
of their officers.
E
In given cases, the employors are constructively liable for
acts of negligence on the part of their employees.
The Alter Ego approach adopted in the theory of Corpo-
rate liability which has been applied by the House of Lords in
F Lennard's Carrying Co. Ltd. v.Asiatic Petroleum Co Ltd [1915]
AC 705 HL is one such instance. The facts of the case con-
cerned a cargo claim which Lennards sought to defend by con-
tending that Section 502 of the Merchant Shipping Act 2894
exonerated the owner from losses arising without his actual fault.
G The House.of Lords held that they could not rely on that defence
since the fault of the appropriate organ such as the Board of
Directors or managing Director could be attributed to the com-
pany.
In Farrar's Company Law, 41h Edn. Page 147, it is stated:
H
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 461
CREDIT SOCIETY LTD. & ANR [S.B. SINHA, J.]
)...
"An employee who acts for the company in the course of A
his or her employment will usually bind the company and
his or her knowledge will be attributed to the. company
because he or she is the company for the purpose of the
transaction in question.
This is so even if the employee is acting dishonestly or B
against the interests of the company or contrary to orders
/" but it is not so where the company is the victimThis is to
.. avoid an obvious contradiction."
Another instance of the application of the theory of Corpo-
rate Liability is the 'Attribution Approach' as adopted by the
c
Judicial Committee of the Privy Council in Meridian Global
Funds Management Asia Ltd. v. Securities Commission [
1995] 2AC 500, [1995] 3All ER 918.
In that case, two employees of Meridian, had improperly D
used their authority to purchase in the name of the company a
substantial interest in Euro-National Corp. Ltd., a New Zealand
listed company. Under the New Zealand Securities Amendment
Act 1988, Meridian was required to give notice of its acquisi-
tion to ENC and the Stock exchange. The two employees knew E
this but the Board and the managing Director of Meridian did
not. No notice was given. The Privy Council upheld the New
Zealand Court's in decision holding that Meridian had contra-
vened the law, on the premise that the knowledge of the em-
l ployee would be attributed to Meridian. F
We will, thus, assume for the purpose of this case that the
Banks are constructively liable for acts of their employees. We
will also assume that the Banks are liable to pay the amount
under the contract for which the FDRs were issued.
G
11. The main question, however, would still remain as to
whether in a case of this nature (which would in turn depend on
the finding of fact) as to whether the petitioners themselves or
their ~gents being party to the fraud, any direction in the public
law domain can be issued. The larqer question would be as to
H
462 SUPREME COURT REPORTS [2008] 9 S.C.R. ....
whether the writ petitions having not been found to be maintain-
.
A
able being purely of private law character, the High Court could
treat it to be one involving a public law domain and could still
have private law remedy available to the writ petitioners?
A writ petition indisputably would be maintainable even in
B relation to a matter arising out of contract qua contract.
12. As has been submitted by Mr. Sundaram that some
"
cases may start on a private interest but if the court finds in-
~
volvement of a public law element therein concerning a large
c number of people, it may proceed on the basis as if it was a
public interest litigation and appoint a Committee and then grant
relief in favour of the writ petitioners. Whether such an extraor-
dinary case has been made out herein is the question.
Respondents are cooperative societies. They at the in-
D stance of some agents or the middlemen thought it expedient
to invest in Fixed Deposit Receipts (FDRs) in Bank of Baroda
and Indian Bank. The modus operandi appears to be that the
"
brokers/intermediaries lured a few cooperative banks/credit
societies for placing deposits with the branches of Bank of
~
E Baroda/Indian Bank in and around Surat as also at Bharuch
wherefor a handsome commission/incentive ranging from 3.8
to 25 per cent used to be given. The Cooperative Societies
themselvei;; did not approach the Bank. All acts were done
through ·the agents. The documents seem to have been sent y
F throuqh brokers who also delivered to them the Maturity Value '
'
Certificates in lieu of original FDRs or the FDRs/Xeroxed cop-
ies, in addition to delivery of drafts for commission. The com-
mission used to be paid in cash. In some cases, the original
FDRs were retained by the banks. However, the original docu-
ments sent by the cooperative societies to the banks in some
G
cases were not available in the offices of the bank but a differ-
ent set of documents were replaced in the files. Loans were
raised against FDRs on the basis of such documents mainly
for further investment by private individuals. Funds were with-
drawn in cash either directly from their current accounts or by
H
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 463
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
issuing cheques in favour of some individuals who reportedly A
discounted their cheques.
13. The fact that the officers of the banks were involved in
the entire dealings is not in dispute. It is furthermore not in dis-
pute that some brokers/commission agents were also involved.
To what extent, the authorities of the cooperative banks and/or B
cooperative societies were involved and/or in know thereof,
however, is not very certain.
Respondents - Cooperative Societies prayed for issuance
of a writ of or in the nature of mandamus or any other appropri- c
ate writ, order or direction quashing and/or setting aside the
letter at Annexure A dated 2.4.98 of respondent No. 1. It was
furthermore prayed that the respondent Nos. 1 and 2 be directed
to honour the FD Rs copies of which were annexed thereto with
the interest accrued thereon and to restrain the respondent No.
0
1 to appropriate the proceeds of the said FDR and also be
"- further directed to honour the FDR with interest accrued thereon
on such terms and conditions which the Hon'ble Court deems
fit.
The learned single judge issued the following directions: E
"I. A Committee is hereby constituted as under:-
(i) The Deputy Governor of the Reserve Bank of
India himself or his nominee as the Chairman
I
)
of the Committee. F
(ii) One member to be nominated by the Deputy
Governor of the Reserve Bank of India who shall
be the officer of the highest rank in the Reserve
Bank of India but subordinate to Dy. Governor.
G
(iii) One member from the Bank of Baroda/Indian
'\-
Bank to be appointed by the Board of Directors
of the concerned Bank preferably a Chief
General Manager or an officer not below the
rank of General Manager.
H
464 SUPREME COURT REPORTS [2008) 9 S.C.R.
A II. The member from Bank of Baroda would participate
in the meeting of this Committee only when the cases
relating to the Bank of Baroda are taken up and the
member from the Indian bank shall participate in the
meeting of the Committee only when the cases
B relating to Indian Bank are taken up.
Ill. The Committee may evolve and follow its own
procedure and will also have the power to examine
summon or examine the witnesses.
c IV. This Committee shall examine each and every case
on its own merits with reference to the records
desired to be made available and will give its findings
with regard to the amount due and payable to the
concerned petitioners/parties and the rate of interest.
The Bank of Baroda and Indian Bank shall inform the
D
Committee in writing about the undisputed amount
with full details. This Committee shall also go into the
question of the rate of interest payable in case of the
undisputed amount, which is directed to be paid
under this order. It will also be open for the Committee
E to opine as to who were the officers/employees/party
responsible for this conspiracy and fraud.
-.
v. The findings as may be given by the Committee shall
be binding on both the sides and shall be
F implemented forthwith. l
I
VI. The petitioners/parties on receipt of any amount as
a result of the finding of the Committee as aforesaid,
shall also give an undertaking to the concerned Bank
before the amount is withdrawn, that in case as a
G result of CBI inquiry, it is found and held by the
concerned Court after the trial that any amount had
been withdrawn by any such party, as a part of the .(
aforesaid conspiracy, etc. they will return such amount
to the concerned Bank.
H
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 465
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
VII. The Committee shall decide all these cases within a A
period of three months from the date the certified
copy of this order is produced before the Dy.
Governor of the Reserve Bank of India.
VIII. It will be open for the petitioners/parties to agitate
their grievance, if any, against the orders which may B
be passed as a result of the findings of the
Committee constituted under this Court's order as
aforesaid.
IX. These directions are in addition to and not in c
derogation of any legal remedy, which any party may
seek after the report of this Committee.
x. For the time being, the concerned Banks, i.e. Bank
of Baroda/Indian Bank shall disburse the undisputed
amount, if any, with interest at the rate of Savings D
Bank Account to the respective petitioners/parties
within 15 days from the date the copy of this order is
produced before the concerned Bank. The payment
shall be made through Demand Drafts in the name
of the petitioners Societies/Banks/Depositors. E
However, if the Committee decides any rate of
interest higher than the Savings bank Account, the
consequences shall follow."
The learned single judge opined that there existed dis-
l puted questions of fact in respect whereof no definite finding F
could be arrived at having regard to the modus operandi of the
persons involved.
14. The private dispute between the parties were, thus,
sought to be converted into a public interest litigation for the
G
purpose of making an enquiry into the affairs of the bank by a
Committee.
'l·
The Committee was consisted of the following members:
H
466 SUPREME COURT REPORTS [2008] 9 S.C.R.
A "(a) Mr. JR Prabhu - Chairman
Banking, Ombudsman, Mumbai
(b) Mr. VS Oas, Regional - Member
Director, RBI, Ahmedabad
B
(c) Mr. RV Tyar - Member
General Manager,
Bank of Baroda
c Or
(d) Mr. S. Arunachalam, - Member
General Manager,
D Indian Bank.
As per the judgment of the learned single judge, the Com-
mittee consisted of three members. When the Committee dealt
with the cases of Bank of Baroda, only the representative of
Bank of Baroda acted as a member and when the Committee
E dealt with the cases of Indian Bank, only the representative of
the Indian Bank acted in the said capacity. The other members
of the Committee were Shri JR Prabhu, Banking Ombudsman,
Mumbai and Mr. VS Oas, Regional Director, RBI, Ahmedabad.
15. We have been taken through the report submitted by •
I
F the Committee. The Committee did a yeoman job. It went into
various aspects of the matter. It tried to cover as much ground
as possible. It noticed the facts leading to setting up of the Com-
mittee. It considered the written submissions as also the oral
submissions of the appellant and the submissions made by the
G respective banks, the officers of the banks, the intermediaries
as also the actions taken by the banks concerned.
{
Whereas general observations and recommendations by
all the members appear to be unanimous, no unanimity how-
H ever could be reached in regard to the question as to what di-
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 467
CREDIT SOCIETY LTO. & ANR. [S.B. SINHA, J.]
rection could be issued in the matter. A
Whereas the Chairman and Regional Director, RBI were
of the opinion that the banks should refund the disputed amounts
of deposit to the depositors; other two members representing
the Banks were of the view that the return of the deposits may
amount to double payments to the depositors. B
It was opined:
r-
"The Committee is required to examine each and every
case on its own merits with reference to the records and
its findings in regard to amount due and payable to the c
concerned petitioner borrowers in terms of the terms of
reference based on the orders of the Gujarat High Court.
The modus operandi in perpetrating the fraud in respect
of all the petitioner depositors has been the same. There
have been only minor variations here and there. Couple of 0
petitioner depositors has mentioned during their
deposition before the Committee that some of them had
gone to the banks' branches along with the middlemen/
intermediaries for placing the deposits. The photographs
and specimen signature of all the authorized signatories E
of the cooperative societies/cooperative banks were not
available on the banks' record. The banks records also
do not reveal that the authorized signatories had signed
the account opening forms and the loan documents in the
I
y presence of the officials of the banks. The resolutions F
purported to have been passed for the purpose of availing
of loans by the cooperative societies/cooperative banks
have not been on their letterheads in almost all cases. In
view of these reasons it has not been considered
necessary to differentiate the cases of the petitioners and
G
the Committee's recommendations are uniformly
applicable to all the petitioner depositors.
A Statement indicating the disputed and undisputed
amounts submitted by the two banks to the Committee is
given in Annexure 3. The undisputed amount deposited H
468 SUPREME COURT REPORTS (2008) 9 S.C.R.
A with the Gujarat High Court by Bank of Baroda amounts
to Rs. 3.16 crore and interest thereon at Savings bank
rate Rs.29.02 lakh. An undisputed amount of Rs. 16.20
lakh has been remitted to the Income Tax Authority. The
disputed amount of deposits aggregate Rs. 20.00 crore.
B In the case of Indian Bank, the undisputed and disputed
amounts of deposits aggregate Rs. 72.85 lakh and Rs.
4.45 crore respectively. The bank has stated that it has
deposited the undisputed amount of Rs.72.85 lakh with
interest of Rs. 1.66 lakh in the Court.
C The refund of the deposits to the petitioner depositors by
the banks should, however, be subject to certain terms
and conditions which are as under:
a) The cooperative societies/cooperative banks should
execute necessary documents as per the banks'
D
procedure.
b) The banks could take indemnity bonds from persons
acceptable to them apart from the cooperative
societies/cooperative banks before effecting the
E refund of the disputed amount of deposits.
c) . In case at a later date for any reason the amounts
are required to be refunded to the banks by the
cooperative societies/cooperative banks they will
have to pay interest at the prime lending rates of the ,
F bank concerned compounded at half yearly rest from '
the date of refund of the deposits by the banks till the
date of repayment by the cooperative societies/
cooperative banks to the two banks."
G Unanimity, however, was arrived at that no interest on the
amount of deposits would be payable. It opined that the officers
of the banks were primarily responsible for perpetration of fraud.
Mr. Rao had taken us through various parts of the report
as also the charge sheet submitted by the C.B.I. to contend that
H involvement of the brokers/commission agents appointed by
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 469
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
~
some of the cooperative societies has also been found both by A
the Committee as also by the C.8.1. It was also submitted that in
any event most of them were aware of the illegal transactions
which had been going on and that they had directly or indirectly
connived with the officers of the banks in respect of their activi-
ties, which would be apparent from the fact that th~y used to get B
a large amount by way of interest, a portion of which was paid
in cash and which was not even accounted for.
Our attention has also been drawn to the charge-sheet filed
by the Central Bureau of Investigation, wherein Jyotiben, the
agent of the cooperative societies/bank has also been made c
an accused. One of the cooperative societies, it was pointed
out, had even authorized her to enter into negotiations with the
Bank.
In the said charge-sheet, it was stated:
D
"It has been stated by the executive and office
bearers of the society that, we have appointed
Jyotiben as the agent for the purpose of depositing
and withdrawing the F.D. at Surat and to give loan on
the F.D. Receipts etc. It is the say of this Jyotiben E
that, since there is a big lobby of industrialists and
builders in Surat city, if they are given the loans on
ollr deposits receipts, they are paying us 24% interest
'( and on the other side, we are getting 11% interest,
I
and thus, since we have been getting 35% interest, F
the deposits were made through them."
Mr. Sundaram, on the other hand, submitted that the fact
that it was only the officers of the banks who have been found to
be primarily liable and their modus operandi was to grant loan
utilizing the said FDRs. wherefor the cooperative societies had G
no role to play.
It was urged that in view of the fact that the officers of the
banks have been founr:l to be liable, the cooperative societies
should not be punished.
H
470 SUPREME COURT REPORTS [2008] 9 S.C.R.
~
A 16. A writ court exercising the power of judicial review has
a limited jurisdiction. A writ petition would lie against a State
within the meaning of Article 12 of the Constitution of India. In-
disputably, exercise of jurisdiction by the High Court is permis-
sible in a case where action of the State is found to be unfair,
B unreasonable or arbitrary. The question which should have been
posed by the High Court was as to whether the action of the
bank was so arbitrary so as to invoke the pyblic law jurisdiction.
If the answer to the said question was to be in the negative, the
High Court should have refused to exercise its jurisdiction.
c A fraud has been practiced on the banks. Primary accused
may be the bank officers but a conspiracy with them by the out-
siders has also been alleged. The original FDRs only in some
cases are available; in most of the cases they are not. Even the
Committee could not decide for as to which one was the origi-
D nal FDR and which was not. It could not distinguish between an
original FDR and the Xerox copy thereof.
Opinion of the expert thereon might have been received,
but the final verdict thereupon in the cases initiated by the C.B.I.
is still awaited.
E
17. The law as regards application of the power of judicial
review, inter alia, in the contractual filed stands covered by a
large number of decisions. (See :UC oflndia & anr. vs. Con-
sumer Education & Research Centre & ors., [(1995) 5 sec y
F 482], Sanjana M. Wig (Ms) ·vs. Hindustan Petroleum Corpn.
Ltd. [(2005) 8 SCC 242], ABL International Ltd & Anr.. vs. Ex-
port Credit Guarantee Corporation of India Ltd & ors.. [(2004)
3 SCC 553], The D.FO, South Kheri & ors. vs. Ram Sanehi
Singh [(1971) 3 SCC 864]. We, however, do not think that facts
involved in each case and the law laid down therein need to be
G
discussed at length as there does not exist any dispute in re-
gard to basic principles laid dowr therein. -I
In M/s Hyderabad Commercials vs. Indian Bank & ors.
[1991 Supp. (2) SCC 340), this Court held:
H
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 471
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
~
"Since the basic facts regarding the unauthorized transfer A
of the disputed amount from the appellant's account as
well as the bank's liability wa_s admitted, there was no
justification for the High Court to direct the appellant to file
suit on ground of disputed questions of fact. The
respondent bank is an instrumentality of the State and it B
must function honestly to serve its customers.
,. Would the ratio laid down therein apply in the instant case?
We do not think so. The question as to whether fraud has been
committed by the officers of the bank is pending consideration
before a competent criminal court. There are other various dis- c
puled questions which are required to be gone into in the said
proceeding. The role played by some of the writ petitioners -
respondents is also in issue. Such a seriously disputed ques-
lions of fact, in our opinion, could not have been gone into by
the writ court. D
.- We would accept the proposition of law as propounded
by this Court in Guruvayoor Devaswom Managing Committee
& anr. vs. C.K. Rajan & ors. [(2003) 7 sec 546]. In that case it
was, inter alia, observed that public interest litigation procedures
may be adopted in a case where initially the writ petition was E
filed as a private interest litigation. (See also Ashok Lanka &
anr. vs. Rishi Dixit & ors. (20€l5) 5 SCC 598 at page 618).
We may in this behalf notice development of law in other
"J
I jurisdiction. F
Abram Chayes in his article on "The Role of the Judge in
Public Law Litigation" Harv. Law. Rev. Vol. 89 (1976) at Pg.
1281 opines that "Traditionally, adjudication has been under-
stood to be a process for resolving disputes among private
parties which have not been privately settled." He thus empha- G
sizes the need for a "Public Law" model wherein "the traditional
')-
adversary relationship is suffused and intermixed with negoti-
ating and mediating processes at every point. The judge is the
dominant figure in organizing and guiding the case, and he draws
for support not only on the parties and their counsel, but on a H
•
472 SUPREME COURT REPORTS [2008] 9 S.C.R.
~
A wide range of outsiders-masters, experts and oversight per-
sonnel." He goes on to give examples of school desegrega-
tion, employment discrimination, and prisoners' or inmates'
rights cases as also antitrust, securities fraud and other aspects
of the conduct of the corporate business, bankruptcy and reor-
B ganizations, union governance, consumer fraud, housing dis-
crimination, electoral reapportionment, environmental manage-
ment- fields that display in varying degrees the features of pub- -;
lie law litigation.
According to him, The public law litigation model inter-alia
c has the following features:
"7. The judge is not passive, his function limited to analysis
and statement of governing legal rules; he is active, with
responsibility not only for credible fact evaluation but for
organizing and shaping the litigation to ensure a just and
D
viable outcome.
8.The subject matter of the lawsuit is not a dispute between
private individuals about private rights, but a grievance
about the operation of public policy."
E In Krishna Swami v. Union of India and another With
Raj Kanwar v. Union of India and Another (1992) 4 SCC 605, ""
a constitutional bench of this court had to decide upon the main-
tainability of a writ petition filed under Article 32 against the re-
"r
moval of a Supreme Court judge without impleading the judge '
F himself as a party to the proceedings.
The court on the role of an investigation committee opined:
'The investigation done by the Committee, thus is to
find whether the alleged misbehavior incapacity has
G been proved. Undoubtedly, the public law litigation
often contradicts the premise behind those of private -(
law. In public law wider public interest it involved over
and beyond he contending parties. It concerns the
future and private law litigation is retrospective in
H operation.
INDIAN BANK v. GODHARA NAGRIK COOPERATIVE 473
CREDIT SOCIETY LTD. & ANR. [S.B. SINHA, J.]
What the court could do? It could appoint a Committee. A
But the decision of the Committee would not have been deci-
sive. The Division Bench appears to have applied its mind on
the report, but in the absence of any categorical finding that it
was the officers of the Banks alone who were liable, no direc-
tion as has been done in the instant case should have been B
issued. It may be that in appropriate cases, the court may find
.... the recommendations made by the Committee acceptable .
18. But it is, in our opinion, not a public interest litigation in
that sense of the term. The report, however, was not unanimous.
The opinion of the Committee was a divided one on the crucial c
issue. Two members of the Committee were of the opinion that
whether the amount deposited by the cooperative banks was
received back by them or not, was yet to be ascertained. We
are, therefore, of the opinion that it cannot be said that the fact
finding body, assuming that the same could be constituted, D
~
made such recommendations which could be accepted by the
Court without going into the merit thereof. It is also not a case
~ where any mandatory relief could be granted in favour of the
respondents.
19. Having however said so, we must pose unto ourselves E
a further question. Could those cooperative societies which had
absolutely no role to play in the entire episode should suffer in
any manner whatsoever? The cooperative societies/coopera-
tive banks for the purpose of their day-to-day functioning, re-
quire the amount which they have invested in FDRs on their F
maturity. Should they wait till the criminal cases are over? Should
they be pushed to institute civil suits? They can indisputably be
compensated by grant of interest. What, however, happens if in
the meanwhile in the absence of the requisite funds being avail-
able to them, they find it difficult to run the day-to-day affairs? G
20. Answers thereto may be difficult to find but it is not a
wholly impossible task. We think that the appellant Bank being
a 'State' within the meaning of Article 12 of the Constitution of
India with the assistance of officer(s) of the Central Bureau of
H
474 SUPREME COURT REPORTS [2008] 9 S.C.R.
·<
A Investigation should make all attempts to ascertain as to which
of the cooperative societies/cooperative banks are in no way
involved with the scam, and subject to such precautions as may
be found necessary to be taken, release the amount in their
favour. I-
B 21. In any event, the quantum of the amount which all the
depositors would have otherwise received, in the event their ..,
investment in FDRs is found to be genuine, should be informed •
thereabout. Once the liability of the bank is determined, the bank
may invest the said amount in its own account and issue fresh
c FDRs therefor. Whereas the bank may keep the original FDRs
with itself, it may issue the duplicate copies thereof to the eli-
gible cooperative bank. Such an exercise should be completed
within a period of four weeks from date.
22. In the event, the cooperative society intending to avail
D
loan facilities from the banks for running their business, may )-
approach them which may apart from usual conditions release
the same on a further condition that the amount of FDR would
~
j
remain with them and on that basis, loans may be granted of
such amount. The usual precautions in regard thereto may also
E be taken by the Bank(s).
23. We, while saying so, do not intend to lay down any law.
These directions should not be treated to be precedent. We
are issuing these directions keeping in view that the factual see- l:
F nario obtaining in the case and that non-release of the amount
is likely to enure hardships that may be faced by the coopera-
tive societies. We would also direct the criminal court to dis-
pose of the criminal cases pending before them with utmost
expedition. These appeals are allowed with the aforementioned
directions. There shall, however, be no order as to costs.
R.P. Appeals partly allowed. ~
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