MR. PRAMOD MALHOTRA AND ORS.versusUNION OF INDIA AND ORS.

A                    MR. PRAMOD MALHOTRA AND ORS.
                                    v.
                         UNION OF INDIA AND ORS.

                               FEBRUARY 26, 2004

B                     [S.N. VARIAVA AND H.K. SEMA, JJ.]


          Banking Laws: .

           Banking Regulation Act, I987-Sections 22, 23, 45(2) and (7)-Sikkim
C   Banking Limited (SBL) applied for a licence, but RBI did not respond-Rather,
    RBI found several shortcomings and deficiencies in SBL functioning, yet
    authorised SBL to open a Branch in Delhi-Depositors depositing amount in
    the Branch-Bank incurred net loss of Rs. 56.22 crores-Special audit revealing
    siphoning offunds-Amalgamation of the bank with another bank and under
D   the scheme depositors to be paid interest lesser than the contractual rate-
    Depositors seeking re-payment of their amount at the contractual rate of
    interest by RBI-Writ Petition filed in Supreme Court-Held: RBI while
    performing statutory functions has to balance general public interest with the
    interest and need of banks and financial institutions as such at the stage of
    issuing license for opening a branch-Decision of RBI to grant license to
E   open a branch was not correct when license under section 22 was not granted-
    But it would not be sufficient to foist liability on RBI to repay all depositors-
    Also RBI did not have day to day management and control on the bank and
    its relation with depositors of the bank was not such to hold it liable-Further
    compensation for violation of statutory duties is not applicable to loss caused
F   in financial transactions undertaken by individuals with open eyes.

          Sikkim Banking Limited is registered as a company in Sikkim and is
    carrying on banking activities. Banking Regulation Act, 1987 became
    applicable to Sikkim. SBL applied for a license. RBI did not respond. SBL
    continued to carry on banking business by virtue of the proviso of sub-clause
G   (2) of section 22. In 1996, RBI pointed out operational deficiencies in the
    working of SBL and called upon to cure the same. It also advised to raise
    additional capital to Rs. 50 crores and then only licemie could be issued. In
    1997, RBI conducted financial inspection of SBL and found several
    shortcomings and deficiencies in its functioning yet authorized SBL to open
    a branch in Delhi. SBL issued advertisement offering 14% rate of interest
                                                                                        -
H                                         688
                        PRAMOD MALHOTRA v. U.0.1.                          689
and the petitioners deposited amount in this branch. In 1998, RBI found that       A
SBL had incurred a net loss of Rs. 56.22 crores. Special audit was carried
out which revealed that the funds had been siphoned out to the tune of Rs.
57.50 crores. Government of India then passed an Order of Moratorium and
thereafter notified a Scheme of Amalgamation under Section 45(7) of the Act
by whiCh SBL was amalgamated with the Union Bank of India. Under the
scheme all the depositors were to be paid on pro-rata basis and were required      B
to surrender their fixed deposit receipts in return. Petitioners filed a writ
petition before the High Court challenging the scheme. Pursuant to the
direction of this Court directing that all matters connected with the
amalgamation of SBL with UBI to be decided only in this Court, the writ
petition before the High Court was withdrawn. Hence the present writ petition.     C
        Appellants relying on Anns v. Merton London Borough's* case and also
the other Indian cases wherein it was held that on failure to perform statutory
duties local authorities are liable for the loss resulted, contended that the
various provisions of the Banking Regulation Act cast a duty upon RBI to
properly monitor banking companies and to safeguard the interest of the            D
depositors; that even though for 9 long years RBI had not issued a license to
SBL because it found several deficiencies and irregularities in its functioning,
it still allowed SBL to open a branch by granting a license; and that relying
on the license issued by RBI, all persons who deposited amount with the Delhi
branch of SBL on presumption that such a license had been issued only              E
because SBL's functioning is sound and its management good, RBI must pay
all the depositors in full.

      Respondent-Union of India contended that the Indian cases relied upon
by the appellant are all cases which relate to infringement of life and liberty
under Article 21 i.e. where a person has been injured or killed and in those       p
type of cases the principle that on failure to perform statutory duties local
authorities are liable for the loss resulted has been applied in India; that the
appellant was not able to show any case where these principles have been
applied to financial transactions undertaken by individuals with open eyes in
the hope of making larger profits; and that except for a few stray averments
in the petition there was no averment that by issuing license RBI represented      G
that SBL was sound and credit worthy.

      Dismissing the writ petition, the Court

       HELD: 1.1. The principles laid down in cases relating to infringement
of life and liberty under Article 21 of the Constitution that on failure to        H
                                                                                         ,....
    690                      SUPREME COURT REPORTS                    [2004] 2 S.C.R

A perform statutory duties local authorities are liable for the loss resulted cannot
    be applied to cases of loss caused in financial transactions undertaken by
    individuals with open eyes. 1703-A)

           1.2. RBI is undoubtedly performing a statutory function. Undoubtedly
    the general public int~rest has to be kept in mind by RBI and it also have to
B balance general public inte.rest with the interests and need of banks and
    financial institutions. They. cannot easily close down a banking institution
  . merely be~ause th.en~ are a few irregularities. They have to keep in mind the
    implications of closing a bank or a financial institution. Its impact is not just
    on that bank/financial institution .and its customers and debtors, but on the
C future of financial services in that region. Thus, competing interests have to
    be weighed and balanced. In hindsight it is easy to point fingers. However at
    the stage of issuing license to open a branch it would not have been an easy
   decision for RBI to have closed SBL when it was a major Bank in a small
    State like Sikkim. One may criticize the decision of RBI to grant SBL a licence
    to open a Branch in Delhi when the licence under Section 22 had not yet been
D granted, but still that will not be sufficient to foist liability on RBI to repay
    all depositors. Such liability will be rarely imposed. RBI did not have day to
    day management or control on SBL. Also the relationship of RBI with
    creditors or depositors of SBL was not such that it would be just or reasonable
    to impose a liability on RBI. [703-B-E]

E          1.3. In .the instant case, there was absolutely no.averment regarding bad
    faith. No case was made out on the basis of public misfeasance. Compensation
    for violation of a statutory duty to enable individuals to recoup financial loss
    has never been recognized in India. Petitioners having chosen on their own to
    deposit amounts with the SBL cannot claim to recover.against RBI. In such a
p   case the loss has to be allowed to fall where it falls. [703-F-G-)
          Union of India v. United India Insurance Co. Ltd, [1997) 8 SCC 683;
    Nilabati Behera v. State of Orissa, (1993) 2 SCC 746 and R.D. Shetty v.
    International Airport Authority, [1979) 3 SCC 489, referred to.

        . Anns v. Merton Lo~don Borough, (1978) AC 728; Yuen Kun-yeu vs. A-G.
G   of Hong Kong, (1987) 2 All ER 705; Davis v. Radcliffe, (1990) 2 All ER 536;
    Sutherland Shire Council v. Heyman, (1985) 60 Australian Law Reports 1;
    Three Rivers DC v. Bank of England, (2000) 3 All ER 1: (2001) 2 All ER 513
    and Murphy v. Brentwood District Council, (1991) 1 AC 398, referred to.
                                                                                        -'
          CIVIL ORIGINAL JURISDICTION : Writ Petition (C) No. 119 of
H 2001.
                    PRAMOD MALHOTRA v. U.O.I. [VARIAVA. J.J                  691

          (Under Article 32 of the Constitution of India)                           A
          Soli J. Sorabjee, Attorney General, L.N. Rao, Additional Solicitor
     General, K.N. Bhat, Uday U. Lalit, Prashant Kumar, Prasenjit Keswani, Joseph
     Pookatt, Rohan Thawani, Kuldeep Parihar, H.S. Parihar, S. Wasim A. Qadri,
     Nikhil Sakhardande, Saurabh Kirpal, Ms. Sushma Suri, O.P. Gaggar, Ms.
.-   Shipra Ghose, Ranjan Mukherjee, Suchit Mohanty and Parijat Sinha for the
     appearing parties.
                                                                                    B

          The Judgment of the Court was delivered by

            S.N. VARIA VA, J. This Writ Petition has been filed challenging a
     scheme framed by the Reserve Bank of India (for short RBI). Mr. Lalit very C
     fairly stated· at the beginning that he is not challenging the scheme and that
     the only prayer he is pressing is Prayer (g), which reads as follows:

            "(g) issue a writ or order in the nature of mandamus directing the
            Respondents to repay the petitioners and other fix~d deposit holders
            of the erstwhile Sikkim Bank Ltd. in full, including the principal      D
            alongwith the contract rate of interest (14% p.a.)."

            At this stage, the facts may be briefly set out:

           On 2nd August, 1985 Sikkim Banking Overseas Corporation Limited
     got itself registered as a Company in Sikkim. On 22nd October, 1987 its        E
     name was changed to Sikkim Banking Limited (for short SBL). On 11th
     December, 1987 the Banking Regulation Act (for short the Act) became
     applicable to Sikkim. Section 22 of the Act reads as follows:

                 "22. LICENSlNG OF BANKING COMPANIES.- (I) Save as
            hereinafter provided, no company shall carry on banking business in     F
            India unless it holds a licence issued in that behalf by the Reserve
            Bank and any such licence may be issued subject to such conditions
            as the Reserve Bank may think fit to impose.

                 (2) Every banking company in existence on the commencement
            of this Act, before the expiry of six months from such commencement,    G
            and every other company before commencing banking business in
            India, shall apply in writing to the Reserve Bank for a licence under
            this section :

                Provided that in the case of a banking company in e}:istence on     H
     692                     SUPREME COURT REPORTS                     [2004] 2 S.C.R.

A           the commencement of this Act, nothing in sub-section (1) shall be
            deemed to prohibit the company from carrying on banking business
            unti I it is granted a licence in pursuance of th is section or is by notice
            in writing informed by the Reserve Bank that a licence cannot be
            granted to it :

B               Provided further that the Reserve Bank shall not give a notice as
            aforesaid to a banking company in existence on the commencement
            of this Act before the expiry of the three years referred to in sub-
            section ( 1) of section 11 or of such further period as the Reserve
            Bank may under that sub-section think fit to allow.

c              (3) Before granting any licence under this section, the Reserve
            Bank may require to be satisfied by an inspection of the books of the
            company or otherwise that the following conditions are fulfilled,
            namely :-

           (a)   that the company is or will be in a position to pay its present or
D                future depositors in full as their claims accrue;

           (b) that the affairs of the company are not being, or are not likely to
               be, conducted in a manner detrimental to the interests of its present
               or future depositors;                                                       ~
                                                                                           l
                                                                                           I
E          (c)   that the general character of the proposed management of the              I
                                                                                           I

                 company will not be prejudicial to the public interest of its
                 depositors;

           (d) that the company has adequate capital structure and earning
               prospects;
F
           (e)   that the public interest will be served by the grant of a licence to
                 the company to carry on banking business in India;

           (f)   that having regard to the banking facilities available in the proposed
                 principal area of operations of the company, the potential scope
G                for expansion of banks already in existence in the area and other
                 relevant factors the grant of the licence would not be prejudicial
                 to the operation and consolidation of the banking system consistent
                 with monetary stability and economic growth;

           (g) any other condition, the fulfillment of which would, in the opinion
·H             of the Reserve Bank, be necessary to ensure that the c;;trrying on
            PRAMOD MALHOTRA v. U.0.1. [VARIAVA, J.]                         693

           of banking business in India by the company will not be                  A
           prejudicial to the public interest or the interests of the depositors.

          (3A) Before granting any license under this section to a company
      incorporated outside India, the Reserve Bank may require to be
      satisfied by an inspection of the books of the company or otherwise
      that the conditions specified in sub-section (3) are fulfilled and that       B
      the carrying on of banking business by such company in India will
      be in the public interest and that the Government or law of the country
      in which it is incorporated does not discriminate in any way against
      banking companies registered in India and that the company complies
      with all the provisions of this Act applicable to banking companies           C
      incorporated outside India.

         (4) The Reserve Bank may cancel a licence granted to a banking
      company under this section -

           (i)     if the company ceases to carry on banking business in            D
                   India; or

           (ii)    if the company at any time fails to comply with any of
                   the conditions imposed upon it under sub-section (I); or

           (iii)   if at any time, any of the conditions referred to in sub-        E
                   section (3) and sub-section (3A) is not fulfilled :

           Provided that before cancelling a licence under clause (ii) or clause
      (iii) of this sub-section on the ground that the banking company has
      failed to comply with or had failed to fulfill any of the conditions
      referred to therein, the Reserve Bank, unless it is of opinion that the       F
---   delay will be prejudicial to the interest of the company's depositors
      or the public, shall grant to the company on such terms as it may
      specify, an opportunity of taking the necessary steps for complying
      with or fulfilling such condition.

          (5) Any banking company aggrieved by the decision of the Reserve          G
      Bank cancelling a licence under this section may, within thirty days
      from the date on which such decision is communicated to it, appeal
      to the Central Government.

         (6) The decision of the Central Government where an appeal has

..    been preferred to it under sub-section (5) or of the Reserve Bank             H
    694                     SUPREME COURT REPORTS                    [2004] 2 S.C.R.

A           where no such appeal has been preferred shall be final."

          SBL applied for a license. It appears that RBI did not issue any notice
    informing SBL that the license could not be granted.

          Therefore even though the license was not granted SBL continued to
B   carry on banking business by virtue of the proviso of sub-clause (2).

           In I 996 RBI pointed out certain operational deficiencies in the working
    of SBL. SBL was called upon to cure those deficiencies .before a license
    could be issued to it. Thereafter RBI advised SBL to raise additional capital
C   to the extent of Rs. 50 crores by way of a rights preferential issue. RBI made
    it clear that it would consider issue of a licynse to SBL only after the capital
    was so raised. SBL managed to raise an extent of Rs. I 5. I 8 crores, out of
    which approximately Rs. 5.80 crores was by means of diversion of SBL's
    own funds.

D         In February-March 1997 RBI conducted financial inspection of SBL
    and found several shortcomings and deficiencies in its functioning. Yet on
    25th June, 1997 RBI authorized SBL to open a branch in Delhi at the
    Metropolitan Centre, 37 DLF, Kirti Nagar, New Delhi. All the Petitioners are
    depositors/co-depositors in this branch of SBL. It appears that they deposited
E   pursuant to advertisements issued by SBL offering a higher rate of interest
    than other banks.

           In a special scrutiny conducted in 1998 RBI found that non-performing
    assets or bad debts were Rs. 58.26 crores, whereas provision was for only Rs.
    1.52 crores. This meant that SBL had incurred a net loss of Rs. 56.22 crores.
F   Ultimately by a letter dated 15th December, 1998 RBI issued a show-cause-
    notice to the Managing Director Shri A.M. Mustafi under Section 36 AA(2)
    and pending reply prohibited him from acting as the Managing Director. In
    January 1999 RBI removed Shri A M. Mustafi and appointed three additional
    Directors on SBL's Board. Thereafter special audit was carried out. As a
G   result of the audit the Government of India was informed about the poor state
    of affairs in SBL. The Government of India was informed that the funds had
    been siphoned out to the tune of Rs . 57.50 crores.

          On 8th March, 1999, on the advise of RBI, the Government of India
    passed an Order of Moratorium under Section 45 (2) of the Act. SBL filed
H   a Writ Petition in the High Court of Sikkim challenging the Order of
                                                                                       .
                  PRAM OD MALHOTRA v. U.0.1. [V ARIA YA, .I.]                    695

    Moratorium. However, the Petition was dismissed on 2nd September, I 999.             A
    The Special Leave Petition filed against the Order has also been dismissed.

          On 21st December, 1999 the Government of India issued an Order
    notifying a Scheme of Amalgamation under Section 45(7) of the Act. By this
    scheme SBL was amalgamated with the Union Bank of India (for short UBI).
                                                                                         B

-
    Under the scheme all the depositors were to be paid on pro-rata basis. It is
    an admitted position that the depositors are only getting 9.037 % of their
    deposits and they are required to surrender their fixed deposit receipts in
    return.

          The Petitioners filed a Writ Petition in the Delhi High Court challenging      C
    the scheme. However, pursuant to an Order of this Court dated 26th April,
    2000, wherein it was directed that all matters connected with the amalgamation
    of SBL with UBI must be filed only in this Court that Petition was withdrawn
    and this Petition has been filed.

            Mr. Lalit submitted that under the Act RBI has got wide powers to            D
    control banking companies. He submitted that RBI is to ensure that the affairs
    of banking companies are not being or are not likely to be conducted in a
    manner detrimental to the interest of the depositors. He submitted that RBI
    had not issued a license to SBL because it found deficiencies in its working
    and yet on 25th June, 1997 it permitted SBL to open a branch in Delhi. He
    referred to Section 23 of the Act whereby no banking company can open a              E
    new place of business without prior permission of RBI. He pointed out that
    before granting such permission RBI must be satisfied about the financial
    condition and history of the company, the general character of its management,
    the adequacy of its capital structure and earning prospects. He submitted that
    every banking company has compulsory to display the license issued by RBI
                                                                                         F
    at a prominent place. He submitted that the whole purpose is that the public
    would know whether to deal with a particular bank or not. He submitted that
    if a license is granted by RBI then the public would presume that the financial
    condition of the company and the general character of its management are
    good and that the company had an adequate capital structure and earning
    prospects. He submitted that in this case RBI was already aware, before it           G
    granted permission to open a branch, that SBL had not been able to raise the
    sum of Rs. 50 crores as directed by RBI; that it could raise its capital only
    to the extent of Rs. 15.18 crores of which Rs. 5.80 crores was by siphoning
-   of the bank's own funds; that there were several irregularities in its functioning
    and that it had advised SBL to rectify its irregularities. He submitted that yet     H
    696                     SUPREME COURT REPORTS                   [2004] 2 S.C.R.

A RBI granted the license to open a branch thereby enabling SBL to dupe
    innocent depositors. He submitted that even though RBI became aware by
    1998 that non-performing assets were to the tune of Rs. 58.26 crores and that
    there was a short provision of Rs. 55.72 crores RBI allowed SBL to issue
    advertisements seeking deposits offering high rate of interest and did not
B   warn the public about the poor financial condition of SBL.

          Mr. Lalit relied upon the case of Union ofIndia v. United India Insurance
    Co. Ltd., reported in (1997] 8 SCC 683. This was a case where a bus, whilst
    crossing a unmanned railway crossing, was hit by a train. As a result thereof
    40 passengers and the driver were killed - and many other passengers were
C   injured. A large number of claims were filed before the Motor Accidents
    Claims Tribunal. The Tribunal in some of those cases held that the driver of
    the bus was negligent and passed awards against the owner of the bus and
    the Insurance Company. The Tribunal dismissed the claims against the
    Railways on the ground that there was no negligence on the part of the driver
    of the railway engine or on the part of the Railway administration. On Appeals,
D   the High Court held that the Railways were also liable.

          The Union of India then filed Appeals to this Court. This Court framed
    the following questions for consideration:

                "( 1) What are the common law duties of a motor vehicle driver
E           at a railway level-crossing? Whether, on facts, the bus driver was
            negligent?

                (2) Whether, under the "doctrine of imputation" the negligence
            of the driver in which the passengers travelled could be imputed to
            the passengers by the Railways as part of the defence for the purpose
F           of raising a plea of contributory negligence of the passengers?

                (3) Whether under the law of torts the claimants in rail-motor
            collisions can claim that the obligations of the Railway under the
            statute as well as under common law will run concurrently? What are
            the common law duties of the Railways at level-crossings and whether
G           the Railway is bound to take cognizance of the increase in the volume
            of traffic and ought to have installed gates and kept a watchman at
            the level-crossing?



H
                (4) Whether a public authority upon whom powers are conferred
            by ~tatute to exercise discretion for benefit of the public can be said
                                                                                      -
                 PRAMOD MALHOTRA v. U.0.1. [VARIAVA, J.]                      697
           to be under a duty of care so that omission to exercise that power         A
           could be treated as negligence at common law giving a right to
           compensation? If not, whether there are any exceptions to the rule
           that a statutory "may" can never give rise to a common law "ought"?
           What is the effect of the omission of the Railways to exercise power
           under Section 13(C) and (d)?
                                                                                      B
               (5) Whether the Motor Accidents Claims Tribunal has jurisdiction
           under Section 110(1) of the Motor Vehicle Act, 1939 read with Section
           110-B thereof [corresponding to Sections 165 and 68(1) against the
           Railway administration when a motor vehicle is hit by a railway train
           and whether the Tribunal can pass an award under Section 110-B             C
           against the Railways also, in addition to an award against the owner
           of the vehicle, driver and the insurer?"

          For our purposes Questions 3 and 4 above are relevant. Whilst
    considering these questions it was noticed that in India, unlike as in England,
    no duties were directly impos~d on the Railway Administration to erect gates      D
    or employ watchmen ~tc. at level crossings if the railway line was cutting
    across a public road. It was noticed that the only provision was Section 13
    of the Railways Act which reads as follows:

           "13. Fences, screens, gates and bars.- The Central Government may
           require that, within a time to be specified in the requisition or within   E
           such further time as it may appoint in this behalf,-

               (a) boundary-marks or fences be provided or renewed by a railway
            administration for a railway or any part thereof and for roads
            constructed in connection therewith;

                (b) any works in the nature of a screen near to or adjoining the
                                                                                      F
            side of any public road constructed before the making of a railway
            be provided or renewed by a railway administration for the purpose
            of preventing danger to passengers on the road by reason of horses
            or other animals being frightened by the sight or noise of the rolling-
            stock moving on the railway;                                              G
                (c) suitable gates, chains, bars, stiles or handrails be erected or
            renewed by a railway administration at places where a railway crosses

-         · a public road on the level;

                (d) persons be employed by a railway administration to open and       H
    698                     SUPREME COURT REPORTS                   [2004] 2 S.C.R.

A           shut such .gates, chains or bars."

    This Court held that in view of this provision there was no direct obligation
                                                                                       ----
    on the Railway Administration and there was no sta~utory ·duty of the Railway
    administration unless a requisition was made by the Government. It was held
    that the above anomaly has naturally compelled the Courts to fall back upon
B   the common law duties resting on the Railways which would impose special
    responsibilities on the Railways to keep accidents at the minimum. It was
    held that these common law duties were enforceable concurrently with the
    statutory duties of the Union under Section 13 or independently of it. This
    Court then went on to consider what were the common law duties of Railways
C   at level crossings and held that there was a duty to take care to see that
    accidents did not occur. This Court therefore confirmed the findings of the .
    High Court that the Railways must be deemed to be negligent in notconverting
    the unmanned level crossings into manned crossings. This Court then went
    on to consider whether omission to perform statutory duties can or cannot
    give rise to action in private law and if they cannot, ordinarily, whether there
D   are any exceptions. This Court strongly telied upon the case of Anns v.
    Merton London Borough reported in (1978) AC 728: In this case the local
    authority did not properly scrutinize building plans, which resulted in cracking
    of walls. The local authority was held liable for the loss which resulted from
    their failure to perform their statutory duties. At this stage itself it must be
E   mentioned that in the case of Murphy v. Brentwood District Council, reported
    in (1991) 1 AC 398, it has been held that the principle laid down in Anns's
    case cannot be applied to economic losses. Based upon the principles laid
    down in Anns's case this Court held that two conditions must be proved for
    passing a duty of care on the exercise of statutory power, viz. first that it
    would have been inational not to have exercised the power so that there was
F   a public duty to act and secondly that the policy of the statute must have been
    to require compensation to be paid to persons who would suffer damages
    because the power conferred was not exercised at all or not exercised when
    it was gene~ally expected to be exercised. This Court then held that these two
    conditions were fulfilled inasmuch as Section 13 required the Central
    Government to send a requisition to Railways to build suitable gates, chain,
G   bars, walls erected by the Railway administration. This Court held that it was
    irrational not to have exercised the power as there was a public duty to do
    so. This Court then went on to hold that Section 13 impliedly required
    compensation to be paid to the persons who would suffer damages because
    the power was not exercised when it should have been exercised.
              PRAMOD MALHOTRA v. U.0.1. [VARIAVA, J.]                       699

      Strongly relying upon this case, Mr. Lalit submitted that the various         A
provisions of the Act cast a duty upon RBI to properly monitor Banking
Companies and to safeguard the interest of the depositors. He submitted that
one of the parameters, whilst considering when to grant license, is to check
whether all deposits would be returned in full. He submitted that even though
for 9 long years RBI had not issued a license to SBL because it found
irregularities in its functioning, it still allowed SBL to open a branch by         B
granting a license under Section 23. He submHted that this was done even
when RBI had known from 1996 onwards that th~re were deficiencies and
irregularities in the functioning of SBL. He submitted that even though RBI
had called upon SBL to raise its share capital and SBL had failed to do so,
the license was issued. He submitted that in this case both the conditions,         C
namely, the statutory duty to act and impliedly the requirement to pay
compensation to persons who suffer damages by virtue of non-exercise of the
power, were present. He submitted that RBI must return all the deposits in
full.

       Mr. Lalit also relied upon the case of Nilabati Behera v. State of Orissa,   D
reported in [1993] 2 SCC 746. He submitted that it has been held in this case
that the award of compensation· in a proceeding under Article 32 or Article
226 is a remedy available in public law, based on strict liability for
contravention of fundamental rights to which the principle of sovereign
immunity did not apply, even though it may be available as a defence in             E
private law in an action based on tort.

      Mr. Lalit fairly pointed out the case of Sutherland Shire Council v.
Heyman, reported in (1985) 60 Australian Law Reports I. In this case the
local authority, whose duty was to inspect buildings was sought to be sued
when a house was damaged due to inadequate foundation for the same. The             p
High Court of Australia did not accept the principles in Anns's case. However
Mr. Lalit submitted that even in this case it has been held that the public
authority may be subject to a common law duty of care when it exercises a
statutory power or performs a statutory duty.

      Mr. Lalit also relied upon the case of R.D. Shetty v. International           G
Airport Authority, reported in (1979) 3 SCC 489. In this case the question
was regarding grant of license to run a restaurant-cum-snack bar at the
International Airport at Bombay. The decision of the Airport Authority was
challenged and the Court was considering what were the constitutiona\
obligations on the part of the State when it takes any action in its statutory      H
    700                     SUPREME COURT REPORTS                   [2004] 2 S.C.R.

A or executive authority. It is in this context that it was held that an executive
    authority must be rigorously held to standards by which it professed its
    actions to be judged and it must scrupulously observe those standards on pain
    of invalidation of an act in violation of them.

          Mr. Lalit submitted that, in this case, all persons who deposited with
B the Delhi branch of SBL relied on the license issued by RBI. He submitted
    that they presumed that such a license had been issued only because SBL
    functioning is sound and its management good. Mr. Lalit submitted that on
    the above principles this Court must direct RBI to pay all the depositors in
    full. Mr. Sorabjee submitted, and in our view correctly, that the Indian cases
C   relied upon by Mr. Lalit are all cases which relate to infringement of life and    --"-
    liberty under Article 21 i.e. where a person has been injured or killed. It is .
    in those type of cases that the above mentioned principles have been applied
    in India.

          Mr. Sorabjee pointed that Mr. Lalit was not able to show any case
D   where these principles have been applied to financial transactions undertaken
    by individuals with open eyes in the hope of making. larger profits. He
    submitted that except for a few stray averments in the Petition there was no
    averment that by issuing license RBI represented that SBL was sound and
    credit worthy.

E         Mr. Sorabjee relied upon the case of Yuen Kun-yeu v. A-G Of Hong
    Kong, reported in (1987) 2 All England Law Reports 705. In this case the
    Commissioner of Deposit-taking Companies in Hong Kong had regulatory
    functions in relation to deposit-taking businesses in Hong Kong by virtue of
    the Deposit-taking Companies Ordinance, 1976. The Commissioner was sought
F   to be made liable for losses incurred by depositors in a Deposit Taking
    Company which went into liquidation. It was claimed that that Company had
    been run fraudulently; speculatively and to the detriment of depositors and
    that even though the Commissioner had reasons to suspect that the Company
    was being so run he had failed to take any action to protect the depositors.
    It was claimed that the depositors had relied upon the fact of registration as
G   indicating that the Company was a fit and proper body and that the Company
    was under the supervision of the Commissioner. It was claimed that the
    Commissioner knew or ought to have known that the affairs of the Company
    were being conducted fraudulently, speculatively and to the detriment of the         .
    depositors and that he should never have registered the Company or should
H   have revoked its registration. Thus the facts of this case are almost identical
                           PRAMOD MALHOTRA v. U.0.1. (VARIAVA, J.]                       701
.........    to the present case and the submissions are also the same. The High Court           A
             of Hong Kong struck out the claim on the basis that it disclosed no cause of
             ~ction. The Privy Council held that the above mentioned factors were not
             sufficient to establish duty of care in negligence. It was also held that there
             was no close and direct relationship or proximity between the parties enough
             to give rise to such a duty. It was held that rarely would the further question
             whether public policy required liability for breach of such a duty would be         B
             considered. It was held that even though it wa~ reasonably foreseeable that
              if an uncreditworthy company were to be registered or allowed to remain on
             the register persons who deposited money with it would be at risk of losing
             their money, mere foreseeability of that harm did not by itself create sufficient
              proximity between the Commissioner and would be depositors for a duty of           C
             care to arise. It was held that the Commissioner had no control over the day
             to day management of the Company and that the Ordinance did not give far
             reaching and stringent supervisory powers so as to warrant an assumption
             that all registered companies were sound and fully creditworthy. It was held
             that in any case the Commissioner cannot reasonably be expected to know
            ·that would be depositors would rely on the fact of registration as a guarantee      D
             of the soundness of the Company.

                   Mr. Sorabjee relied upon the case of Davis v. Radcliffe reported in
            (1990) 2 All England Law Reports 536. In this case the Plaintiff had deposited
            £ 7,000 with a Bank in Isle of Man. That Bank was licensed, under the                E
            Banking Act, for a number of years. The license was revoked only in June
            1982. In August 1982 the bank collapsed with a deficit in excess of £ 40
            million. An action was brought against the I~le of Man Finance Board and
            the Treasurer claiming damages for loss of amounts deposited with the Bank
            on the allegation that it was caused by the negligence of the defendants in
            carrying out their duties under the Banking Act. The alleged duties were the         F
            duties in issuing a license and/or the duty to refuse or to revoke a license or
            to suspend or discontinue the business of a bank and to inspect t.he books and
            documents of a bank. It was claimed that the Board and the Treasurer owed
            their depositors a duty to carry out their statutory functions in relation to
            licensing and supervision of the Bank in such a manner that the depositors'          G
            funds were safe and properly managed. Thus, the facts of this case were also
            identical to the facts of the present case. Such a claim was not accepted. It
            was held that relationship between the Plaintiffs and Defendants was not such
            that it would be just and reasonable to impose the liability in negligence for
            the loss suffered by the Plaintiffs. It was held that the Board and the Treasurer
            were exercising typical functions of modem Government in the general public          H
    702                      SUPREME COURT REPORTS                     [2004] 2 S.C.R.

A   interest which included balancing of competing considerati'ons. It was held
    that the Defendants did not possess sufficient control over the management
    of the Bank to warrant imposition of liability. The principles laid down in
    Anns's case were held not applicable to financial transactions.

            Mr. Sorabjee also relied upon the case of Three Rivers DCv. Bank of
B    England, reported in (2000) 3 All England Law Reports I and in.(2001) 2
     All England Reports 513. This again was a case wherein the Bank of England
     had granted a license to the BCCI to carry on business as a deposit taking
     institution. BCCI collapsed in 199 l owing to fraud on a vast scale. Several
     thousand depositors brought proceedings against the Bank of England seeking
C    recovery of their sums when BCCI collapsed. In that case it was pleaded that
     the Officers of the Bank of England had acted in bad faith by licensing BCCI
     when they knew that to do so was unlawful and that the Officers had shut
     their eyes to what was happening with BCCI after granting the license and
     had failed to take steps to close BCCI at least by mid 1980s. On a preliminary
     issue the trial Judge struck out the claim. The House of Lords held that this
D   ·could not have been done at the preliminary stage and remitted the matter
     back for trial. But, while so doing, it accepted the principles laid down in the
     case of Davis v. Radcliffe. Thereafter in the same case, while remitting the
     matter back, the House of Lords held that the essential elements should be
     as follows:

E           "First, there must be an unlawful act or omission done or made in the
            exercise of power by the public officer. Second, as the essence of the ·
            tort is an abuse bf power, the act or omission must have been done              -
            or made with the required mental element. Third, for the same reason,
            the act or omission must have been done or made in bad faith. Fourth,
F           as to standing, the claimants must demonstrate that they have a
            sufficient interest to sue the defendant. Fifth, as causation is an essential
            element of the cause of action, the act or omission must have caused
            the claimants' loss."

          Mr. Sorabjee submitted that in the present case there are no averments.
G   He submitted that even if there were averrnents these are not matters which
    could be gone into in writ jurisdiction as it would require extensive evidence.
    He submitted that these are matters in which the Court could not pass any
    order in exercise of its writ _jurisdiction.

          We have heard the submissions of both the parties. Whilst we sympathise
H   with the depositors for their loss, we are unable to· accept the submission of
               PRAM OD MALHOTRA v. U.0.1. [V ARIA VA. J.]                      703
  Mr. Lalit that the principles laid down in cases relating to breach of Article       A
  2 I rights can be applied to cases of loss caused in financial transactions
  undertaken by individuals with open eyes.· ln our view the principles laid
  down in the cases of Yuen Kun-yeu vs. A-G of Hong Kong and Davis vs.
  Radcliffe are fully applicable: In our view the principles laid down in Anns's
  case have no application to financial transactions. RBI is undoubtedly
  performin_g a statutory function. Undoubtedly the general public interest has        B
  to be kept in mind by RBI. But that is not the only thing they have to keep
  in mind. They also have to balance gener.al public interest with the interests
  and need of Banks and financial institutions. They cannot easily close down
· a Banking Institution merely because there are a few irregularities. They have
  to keep in mind the implications of closing a Bank or a financial institution.       C
  A closing of a Bank or financial institution has its impact not just on that
  Bank/financial institution and its customers and debtors but on the future of
  financial services in that region. Thus competing interests have to be weighed
  and balanced. In hindsight it is easy to point fingers. However at that stage
  it would not have been an easy decision for RBI to have closed SBL when
  it was a major Bank in a small State like. Sikkim. One may criticize the             D
  decision of RBI to grant SBL a licence to open a Branch in Delhi when the
  licence under Section 22 had not yet been granted. But still that will not be
  sufficient to foist liability on RBI to repay all depositors. What the Petitioners
  want is to foist on RBI liability for the default of SBL. Such liability will be
  rarely imposed. RBI did not have day to day management or control on SBL.            E
  Also the relationship of RBI with creditors or depositors of SBL is not such
  that it would be just or reasonable to impose a liability in negligence on RBI.

         Even otherwise we find that there are no proper averments. There is
  absolutely no averment regarding bad faith. It was fairly admitted by Mr.
  Lalit that there is no case made out on the basis of public misfeasance. He          F
  fairly stated that at the highest the case could only be that of a violation of
  statutory duties. However, as observed above, compensation for violation of
  a statutory duty to enable individuals to recoup financial loss has never been
, recognized in India. In our view the Petitioners having chosen on their own
  to deposit amounts with the SBL cannot claim to recover against RBI. In              G
  such a case the loss has to be allowed to fall where it falls.

      Under the circumstances, we find no substance in the Writ Petition.
 The same stands dismissed with no Order as to costs.

       Before parting with the case, we would like to note that financial frauds       H
    704                     SUPREME COURT REPORTS                  [2004] 2 S.C.R.

A   are on the rise. We find that the police and CBI are not equipped to deal with
    such cases involving adroit financial manipulations. It is hoped that the
    Government would now set up a special cell, which has the expertise to
    unravel such frauds and trace the frauds. Such a cell must have all the powers
    necessary for investigating, including powers of search and seizure but ·also
B   be authorised to p~osecute the defaulters.

    N.J.                                                      Petition dismissed.    -