2003 (10) TMI 691 - HC - Companies Law

Court Orders Banks to Refund Disputed Amounts, Pay Interest, and Bear Costs

Bank of Baroda Versus Nadiad Machinery and Electrical Merchant Credit Co-op. Soc. Ltd.

The Court directed the banks to refund the disputed amounts to the petitioners, subject to compliance with certain conditions, and to pay the undisputed ... - Issues Involved:1. Refund of fixed deposit receipts.2. Adjudication of disputed questions of fact under Article 226.3. Constitution and authority of the Committee.4. Vicarious liability of banks for fraud committed by their employees.5. Payment of interest on fixed deposit receipts.Issue-wise Detailed Analysis:1. Refund of Fixed Deposit Receipts:The petitions were filed by 22 co-operative banks or co-operative credit societies seeking a directive for the Bank of Baroda and Indian Bank to refund the amounts of fixed deposit receipts. The petitioners discovered that their investments had been misappropriated through fraudulent withdrawals in the form of loans or advances against those fixed deposit receipts without any authorization. The amounts involved were around Rs. 30 Crores. The banks contended that the fixed deposit receipts were pledged as security for advances obtained against them and subsequently adjusted against the outstanding advances. The learned Single Judge directed the formation of a Committee to investigate and report on the amounts due and payable to the petitioners.2. Adjudication of Disputed Questions of Fact under Article 226:The banks argued that the petitions raised seriously disputed questions of fact which could not be decided under Article 226 of the Constitution and that the petitioners had an equally efficacious alternative remedy by way of filing civil suits. The learned Single Judge admitted the petitions, noting that while disputed questions of fact may not be gone into under Article 226, the Court was required to consider the interests of the depositors and the manner in which the deposits were handled by the banks.3. Constitution and Authority of the Committee:The learned Single Judge constituted a Committee chaired by the Deputy Governor of the Reserve Bank of India or his nominee, with one member from the Reserve Bank of India and one member from the Bank of Baroda/Indian Bank. The Committee was tasked with examining each case on its merits, determining the amounts due and payable, and identifying the officers/employees responsible for the fraud. The findings of the Committee were to be binding on both sides and implemented forthwith. The Supreme Court upheld the constitution of the Committee, directing it to investigate and report on the disputed amounts and entitlements.4. Vicarious Liability of Banks for Fraud Committed by Their Employees:The Committee found that the fraud could not have occurred without the active connivance of the bank officials. The banks' own internal investigations revealed serious lapses and irregularities by their officers, including accepting deposits and granting advances through middlemen without proper verification. The Committee concluded that the banks could not absolve themselves of liability and recommended that the banks refund the disputed amounts to the petitioners. The Court held that the banks, being state entities, could not avoid their civil liability for the actions of their employees.5. Payment of Interest on Fixed Deposit Receipts:The Committee recommended that the petitioner depositors be refunded the disputed amounts without any interest and the undisputed amounts with interest at the savings bank account rate. The Court upheld this recommendation, directing the banks to pay the disputed amounts by a specified date and to pay interest at 9% per annum for any delay beyond that date.Conclusion:The Court directed the banks to refund the disputed amounts to the petitioners, subject to compliance with certain conditions, and to pay the undisputed amounts with interest at the savings bank rate. The banks were also directed to bear the costs of the writ petitions and appeals. The appeals were disposed of in terms of these directions.