AI Drafter 
TaxTMI 
TaxTMI 
2009 (9) TMI 1037
X X X X Extracts X X X X
X X X X Extracts X X X X
....en if the master circular is upheld in its entirety, the relevant committee of the bank may still be found to have acted without jurisdiction since the master circular applies to lender-borrower transactions between a bank and another; and, the nature of the agreement which is the subject matter of the proceedings did not involve a lender-borrower relationship between the bank and the petitioner company. The petitioners also allege violation of the principles of natural justice in the bank committing procedural impropriety and maintain that the decision is tainted by institutional and personal bias. 2. The prayers are resisted primarily by the Kotak Mahindra Bank and by the Reserve Bank of India. These respondents say that since the principal act complained of is of a private bank, a petition under Article 226 of the Constitution is inappropriate. They claim that there is an efficacious alternative remedy available by way of arbitration which should deter the Court from entering into the factual disputes and onerous matters involving commercial and banking expertise. The private bank claims that the Reserve Bank has been impleaded and the legality of the master circular question....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esentation to the Reserve Bank claiming that the transaction between the company and Kotak Mahindra Bank was not in derivatives and otherwise invalid. The company contended that the transaction was a capital account transaction under a set of regulations brought in by the Foreign Exchange Management Act. 5. The prelude to the challenge launched in these proceedings is covered in the first 16 paragraphs of the petition. The real grievance appears in the 50-odd pages thereafter. Kotak Mahindra Bank issued a notice on October 22, 2008 asking the petitioner company to show cause as to "why it should not be declared as a willful defaulter ... (and) the Bank ... (not) make appropriate disclosures with the Reserve Bank of India, the Securities and Exchange Board of India, the Credit Information Bureau (India) Limited" under the master circular of July 1, 2008 issued by the Reserve Bank. The petitioner company furnished an initial reply on November 4, 2008 asserting that since the bank's claim had not crystallised it had falsely invoked the guidelines which applied "solely in case of a lender and borrower relationship" and followed it up with another letter of November 21, 2008 emph....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dressal Committee of the Bank, we had forwarded a copy of our letter dated November 4, 2008 to him. Thereafter, vide our letter dated February 10, 2009 our client had requested for the representation hearing to be fixed in Kolkata. By a letter dated February 20, 2009 Kotak Mahindra Bank Ltd. communicated its inability to accede to our request to convene meeting in Kolkata. A copy each of the said letters dated November 21, 2008, February 10, 2009 and February 20, 2009 is annexed hereto and collectively marked Attachment VIII. 11. In the circumstances, we are filing herewith our client's written representation with your good selves so that you may consider our client's submissions as aforesaid and drop the entire proceedings on alleged willful default. However, if despite this written representation, if you are still not satisfied with our client's submissions in the matter, you may indicate the reasons thereof to us and/or to our client and afford our client an opportunity to represent its case further in person through us, for which necessary date, time and place may also be communicated to us/our client sufficiently in advance. 7. Simultaneously with the company....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be entertained particularly when the question of jurisdiction can also be raised before the Committee which is to decide the issue. This Court does not consider this case to be a fit and proper one for exercise of writ powers. The writ petition stands dismissed. However, no opinion is expressed on merits of the petitioner's claim and all points are left open for being agitated by it before the Committee. 11. Despite its reservations, the petitioner company had per force to present itself before the bank's committee. Shortly after the hearing in Mumbai, the salient points of its submission before the committee were recorded on behalf of the company by a letter of by a letter of March 30, 2009. The company recorded that advocates were in attendance on behalf of the bank in course of the hearing who had given "direction to the thinking faculty of the committee." The letter recounted that it had been urged on the company's behalf that the master circular on willful default applied only to a lender-borrower relationship whereupon the chairman of the committee had remarked that a derivative transaction was a non-funded facility and became a funded facility upon the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e set out therein", its grievance redressal committee had declared the company as a willful defaulter on April 7, 2009. A copy of such letter was forwarded to the company. The decision of April 7, 2009 reached the company thereafter. Over four pages and a bit, the committee recorded the basis for declaring the company a willful defaulter under the master circular. The principal reasons furnished in discarding the company's contention that the transaction relevant transaction was beyond the pale of the master circular, appear from the following: 8. Further, the Committee observed that derivative transactions are expressly permitted under the Reserve Bank of India Act, 1934 and are valid so long as one of the parties thereto is a bank or authorized dealer regulated by the Reserve Bank of India. Having regard to the provisions of the RBI Act and considering that there is no ruling or decision by any court whatsoever holding that derivative transactions are speculative and/or are wagering contracts and are therefore illegal, the Committee opined that the Company's allegations in this regard are baseless. 9. On review of the Company's representations, and on the basis ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as well as non-fund based facilities and therefore a customer is considered to be a defaulter irrespective of whether it fails to repay the money borrowed under any fund-based facility or fails to pay the monies that may have become due under a non-fund based facility. This is further evidenced by the strict prudential norms issued by the RBI in relation to recognition of non-performing assets which include dues to banks arising out of loan transactions as well as derivative transactions. In light of the above, and also that the Bank had sanctioned and you had availed of a derivative facility limit, which is a non fund-based credit facility, and entered into inter alia the Transaction, the Committee opined that your contention that a derivative facility does not constitute a 'borrowal' account was untenable and was therefore disregarded." 20. The Bank shall be reporting the said declaration to RBI, CIBIL or such other agency/institution as directed by RBI. All the other processes and procedures as are required to be followed in terms of the Master Circular of Reserve Bank of India issued vide DBOD No. DL.BC.1/20.16.003/2008-09 dated July 01, 2008 shall be carried out fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs. Banks/FIs were advised that they should examine all cases of wilful defaults of Rs. 1.00 crore and above for filing of suits and also consider criminal action wherever instances of cheating/fraud by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were advised that they report wilful defaults to other participating/financing banks also. Cases of wilful defaults at overseas branches were required be reported if such disclosure is permitted under the laws of the host country." 2. Guidelines issued on wilful defaulters Further, considering the concerns expressed over the persistence of wilful default in the financial system in the 8th Report of the Parliament's Standing Committee on Finance on Financial Institutions, the Reserve Bank of India, in consultation with the Government of India, constituted in May 2001 a Working Group on Wilful Defaulters (WGWD) under the Chairmanship of Shri S.S. Kohli, the then Chairman of the Indian Banks' Association, for examining some of the recommendations of the Committee. The Gro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nk/FIs should submit the list of suit-files accounts of wilful defaulters of Rs. 25 lakh and above as at end-March, June, September and December every year to Credit Information Bureau (India) Ltd. (CIBIL) and/or any other credit information company which has obtained/would obtain certificate of registration from RBI in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005 and of which it is a member. Banks/FIs should, however, submit the quarterly list of wilful defaulters where suits have not been filed only to RBI in the format given in Annex 1." "3. Grievances Redressal Mechanism Banks/FIs should take the following measures in identifying and reporting instances of wilful default: (i) With a view to imparting more objectivity in identifying cases of wilful default, decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI. (ii) The decision taken on classification of wilful defaulters should be well documented and supported by requisite evidence. The de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ol and monitor the business and affairs of every banking company. The petitioners say that from the very inception of banking business by a bank to the manner in which such business would be conducted and the all-pervasive directions and powers of the Reserve Bank which a bank is subjected to, demonstrate the extraordinary, sweeping and omnibus authority of the Reserve Bank; such that every bank would be a state or authority within the meaning of Article 12 of the Constitution. The petitioners place Section 22 of the Act that mandates a previous licence to be obtained before any banking business can be commenced; the extent of control exercised by the Reserve Bank under Section 23; the wholesome directions that can be issued by the Reserve Bank under Section 35A; the incisive powers available to the Reserve Bank under Section 36; the authority of the Reserve Bank to remove managerial and other officers under Section 36AA; and, the power vested in the Reserve Bank to appoint directors in banking companies under Section 36AB. 18. The petitioners cite a judgment reported at (2002) DLT 234 (Delhi Stock Exchange v. K.C. Sharma) and rely on paragraphs 31, 32, 40 and 61 thereof to sugg....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... inasmuch as (a) that it is under deep rooted, all pervasive and extensive control of the Government through the Securities Exchange Board of India under the SEBI Act of 1992 and SCRA of 1956; (b) it has a complete monopoly status within the specified territorial limits. (c) It carries out important public/state functions that of completely controlling and regulating the transactions in securities in the country. 19. A similar view taken by the Bombay High Court which found the Bombay Stock Exchange to be amenable to the writ jurisdiction, reported at AIR 1991 Bom 30 (Sejal Rikeen Dalal v. The Stock Exchange, Bombay), has been placed by the petitioners. 20. An unreported Division Bench judgment of the Calcutta High Court in MAT No. 533 of 2002 and FMA No. 254 of 2002 (C. Mackertich Ltd. v. Custodian) delivered on July 19, 2002 is cited in the same context where the question as to whether the Calcutta Stock Exchange was amenable to the writ jurisdiction was left open. Another judgment reported at AIR 1997 Cal 18 (Overland Investment Ltd. v. State of Bengal) is placed by the petitioners to show that if an investment company could be found to be amenab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te interest has to give way to the public interest. If a private property is acquired in public interest it does not mean that the party whose property is acquired is performing or discharging any function or duty of public character though it would be so for the acquiring authority. 33. For the discussion held above, in our view, a private company carrying on banking business as a scheduled bank, cannot be termed as an institution or a company carrying on any statutory or public duty. A private body or a person may be amenable to writ jurisdiction only where it may become necessary to compel such body or association to enforce any statutory obligations or such obligations of public nature casting positive obligation upon it. We don't find such conditions are fulfilled in respect of a private company carrying on a commercial activity of banking. Merely regulatory provisions to ensure such activity carried on by private bodies work within a discipline, do not confer any such status upon the company nor put any such obligation upon it which may be enforced through issue of a writ under Article 226 of the Constitution. Present is a case of disciplinary action being taken agains....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nk Limited into which Bank of Madura had merged. 25. The bank here says that it owes no statutory duty to the petitioners. The bank contends that the fact that its affairs or functioning may be regulated by any authority would not make it amenable to the writ jurisdiction. The bank submits that there is a private contract between the bank and the petitioner company which governs the relationship between such parties; such contract is not statutory. There was no obligation on the part of the bank to enter into such contract. The bank claims that in its declaring the company to be a willful defaulter it discharged no statutory or public duty. 26. The bank refers to a decision rendered by a Single Judge of the Kerala High Court reported at (1988) 64 Comp Cas 399 (K.M. Sethumadhavan v. Dhanalakshmi Bank Ltd.) where it was held that a banking company having a private capital structure, and whose profits go to the private pockets of its shareholders and not to the public exchequer, would not be a state or authority within the meaning of Article 12 of the Constitution. 27. The bank says that for a petition under Article 226 of the Constitution to be maintained against a private b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erform the governmental functions. Several corporations and companies have also been formed by the Government to run industries and to carry on trading activities. These have come to be known as public sector undertakings. However, in the interpretation given to Article 12 of the Constitution, this Court took the view that many of these companies and corporations could come within the sweep of Article 12 of the Constitution. At the same time, there are private bodies also which may be discharging public functions. It is difficult to draw a line between public functions and private functions when they are being discharged by a purely private authority. A body is performing a "public function" when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. In a book on Judicial Review of Administrative Action (5th Edn.) by de Smith, Woolf & Jowell in Chapter 3, para 0.24, it is stated thus: A body is performing a 'public function....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f public duty. The scope of mandamus is determined by the nature of the duty to be enforced, rather than the identity of the authority against whom it is sought. If the private body is discharging a public function and the denial of any right is in connection with the public duty imposed on such body, the public law remedy can be enforced. The duty cast on the public body may be either statutory or otherwise and the source of such power is immaterial, but, nevertheless, there must be the public law element in such action. Sometimes, it is difficult to distinguish between public law and private law remedies. According to Halsbury's Laws of England, 3rd Edn., Vol. 30, p. 682, 1317. A public authority is a body, not necessarily a county council, municipal corporation or other local authority, which has public or statutory duties to perform and which perform those duties and carries out its transactions for the benefit of the public and not for private profit. There cannot be any general definition of public authority or public action. The facts of each case decide the point. 29. The bank says that the source of the power exercised by its grievance redressal committee is t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st of the State to control the affairs and management of the private companies. Such private companies would normally not be amenable to the writ jurisdiction under Article 226 of the Constitution." 10. The writ petition filed by the appellant cannot have any personal grievance in the matter and at best, only its members can have any grievance. It is well settled that ordinarily a writ petition can only be filed by someone who is personally aggrieved. The powers under Article 226 of the Constitution of India should be sparingly used and only in those clear cases where the rights of a person have been seriously infringed and he has no other adequate and specific remedy available to him. The relief under Article 226 of the Constitution of India is based on the existence of a right in favour of a person invoking the writ jurisdiction. The exception to the general rule is only in cases where the writ applied for is writ of habeas corpus or quo warranto or filed in public interest. Even assuming the members of the appellant's Association is affected by an act of the second respondent, but for the purpose of enforcing the rights of the members, writ petition at the instance of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from the Municipal Corporation and to keep the eatables fit for human consumption. All these statutory provisions are regulatory in nature and have been enacted in public interest. Violation of any of the statutory provisions also make the individual liable for punishment under law. The fact that an individual dealing with public is under various statutory obligations to perform certain functions and the obligations does not make his functions a public duty or public functions and subject him to the power of judicial review of the High Court under Article 226. He is purely a private person carrying on business activities for personal gain, without any public duty, though there may be public element in his/its functions or activities." 65. We may also notice herein that the above observations do not mean that in no circumstance this Court can exercise the power of judicial review against the Bank. A distinction has to be drawn between failure to observe the statutory duty and an obligation (s) towards its employees and individuals which are non-statutory in nature." 68. For our conclusions hereinabove we answer the reference by holding: (a) The Jammu and Kashmir Bank....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ub's disciplinary committee concluded that such substance was present in her urine and, in consequence, disqualified the filly and fined her trainer. The applicant sought leave for judicial review by way of an order of certiorari to quash the committee's decision. A preliminary issue was raised as to whether the decision was amenable to judicial review. The question was determined against the applicant and such determination carried to the Court of Appeal, where the order of the Divisional Court was affirmed. The following passage reveals the relevant considerations: I have little hesitation in accepting the applicant's contention that the Jockey Club effectively regulates a significant national activity, exercising powers which affect the public and are exercised in the interest of the public. I am willing to accept that if the Jockey Club did not regulate this activity the government would probably be driven to create a public body to do so. But the Jockey Club is not in its origin, its history, its constitution or (least of all) its membership a public body. While the grant of a Royal Charter was no doubt a mark of official approval, this did not in any way alt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich it arrogates to itself is necessary if it is to function efficiently and effectively. While not wishing to become involved in the political controversy on the relative merits of self- regulation and governmental or statutory regulation, I am content to assume for the purposes of this appeal that self-regulation is preferable in the public interest. But that said, what is to happen if the panel goes off the rails? Suppose, perish the thought, that it were to use its powers in a way in which was manifestly unfair. What then? Counsel for the panel submits that the panel would lose the support of public opinion in the financial markets and would be unable to continue to operate. Further or alternatively, Parliament could and would intervene. Maybe, but how long would that take and who in the meantime could or would come to the assistance of those who were being oppressed by such conduct?" (Page 568) In fact, given its novelty, the panel fits surprisingly well into the format which this Court had in mind in R v. Criminal Injuries Compensation Board. It is without doubt performing a public duty and an important one. This is clear from the expressed willingness of the Secretary of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....blic and private law dichotomy, and procedural obstacles and dilemmas are avoided. 37. On a reading of the authorities it appears that a petition under Article 226 of the Constitution would be maintainable either by virtue of the status of the person or authority complained against; or by virtue of the nature of its general functions or the character of the specific act impugned. The word "maintainability" is loosely used though it has several hues to it; it is used in cases where the action may not be received at all without any application of mind or may initially be received and dismissed at the preliminary stage. It is also used, and probably erroneously, in the context of alternative remedy, but that is a separate discussion altogether. In every case, however, where the issue of maintainability of a writ petition is raised, the key is ultimately found in the nature of the grievance and the legal right canvassed. 38. A writ petition has per force to be allowed to be filed if one of the respondents thereto is obviously a state or authority within the meaning of Article 12 of the Constitution. Yet, such petition may not progress at all if the nature of the right sought to b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cise of a duty which has been imposed in public interest. 39. The regulatory authority of the Reserve Bank over Kotak Mahindra Bank would not make, as the several authorities show, the bank amenable to judicial review. The deep and pervasive control of the State, which is generally a guiding factor to assess whether a respondent would be amenable to this jurisdiction, would not imply the mere regulatory or supervisory control of a statutory authority over the body which is sought to be subjected to judicial review. A partnership firm has to conform to the Partnership Act, a society has to act in accordance with the applicable statute, a company has to comply with the provisions of the Companies Act and, similarly, any bank has to abide by the Banking Regulation Act and the supervision of the central bank under the Reserve Bank of India Act. If, however, the extent of regulatory control by a statutory body over a private body is coupled with a public duty in its general functioning or the private body is a specialised body dealing with the public, as a stock exchange, the consideration would be different. 40. The remedy under Article 226 is essentially a public law remedy and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the negative sense of its coercive impact - bring in the payment that the Bank claims to be its due. The effect of the master circular, therefore, is not for the private benefit of the body invoking it, but for the larger public benefit of others in the banking or financial sector. The master circular begins on the premise that there is an undisputable debt due (never mind, in this context, the source of the debt) and the consideration there under is only as to whether the default in payment thereof is willful within the definition of the relevant expression in the circular. The adjudication and, more importantly, the outcome of the adjudication under the master circular are intended to achieve a larger benefit than the immediate, private interest of the body which invokes it. 42. The petition thus qualifies to progress for further consideration, not upon Kotak Mahindra Bank being found to be a state or other authority generally answering to that description in Article 12 of the Constitution, or on it being assessed to be inherently engaged in discharging public functions, but on the public character of the duty that is intrinsic in its invocation of the master circular. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Act, 1996 (26 of 1996) shall apply to all arbitration under this Act as if the proceedings for arbitration were referred for settlement or decision under the provisions of the Arbitration and Conciliation Act, 1996. 44. The bank says that a statutory arbitration stands on a higher pedestal than an arbitration clause contained in a contract. It argues that Section 18(1) of the 2005 Act is couched in the widest terms and would take within its fold a dispute of the nature that the petitioner company has brought to court. The bank suggests that since the subject involves an element of expertise, the court should treat the objection with a bit more circumspection than the everyday protest on the ground of alternative remedy. The bank says that at the end of the day an objection on the ground of an efficacious alternative remedy is an appeal to the court to exercise its discretion to not receive the petition. The bank is cautious in putting the point across; it says that its prayer to refer the matter to an expert forum under the statutory clause is not to imply the court's inability to address the issues involved but only to emphasise the inconvenience that may be occasioned in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent of Clause 23 of the agreement. But all questions of law, one of which may be interpretation of the agreement, need not necessarily be withdrawn from the domestic forum because the court has discretion under Section 34 of the Arbitration Act or under Article 226 of the Constitution and that the court is better posted to decided such questions. The arbitration Clause 23 is a clause of wide amplitude taking in its sweep even interpretation of the agreement and necessarily, therefore, of Clause 13 therein. We are therefore, unable to accede to the submission that we should exercise our discretion to withhold the matter from arbitration and deal with it ourselves. 47. The Reserve Bank also cites in such context a judgment reported at (2007) 14 SCC 680 (Empire Jute Company Limited v. Jute Corporation of India Ltd.) where the Bisra Stone Lime case was noticed and the Supreme Court exhorted that the existence of an arbitration should deter the writ court from proceeding with the matter. But it would be evident from paragraph 18 of the report that the impugned order of a Division Bench of this Court had referred a part of the subject-matter of the writ petition to arbitration and ret....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ract qua contract or involves arduous disputes on facts, the court would, in any event, not allow the matter to continue in this extraordinary jurisdiction. In such a case the arbitration agreement covering the disputes would be pertinent for the order of dismissal of the petition; the writ court would not relegate the petitioner to a suit or the usual remedy recognised by law but direct it go to the forum agreed to under the relevant agreement. 50. The consideration would, however, be weighed more heavily against the petitioner if a statutory arbitration or an arbitration before an expert body (not of arbitrators but of specialists in the area of activity involved in the engagement between the main parties) is cited to persuade the exercise of the self-imposed restraint to not receive the petition. But such distinction - between a run of the mill arbitration agreement and a statutory arbitration or an arbitration before an expert body - is no different from the court exercising greater restraint (where there is no arbitration agreement covering the subject-matter) in receiving a writ petition when there is a designated forum under, say, a special statute or an appellate forum a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f action was introduced in a plaint to dodge a reference to arbitration. The quality of the challenge to the validity of the master circular has to be assessed; not to the entire hilt but only to probe whether such challenge is a ruse to avoid the arbitral tribunal. There are two facets to the petitioners' assault on the master circular: that it is bad per se for all comers; and, that if the dealings between the company and the bank - whether or not it is a derivative transaction - were to be included in its fold, it would be arbitrary and rendered ultra vires the Constitution. There is an arguable case made out, though it may still fail in the final reckoning. But since the respondents argue that the challenge to the validity of the master circular should not be entertained on the ground of constructive res judicata, the prima facie satisfaction of the quality of the challenge cannot yet be the conclusive basis for repelling the argument on alternative remedy. 53. There is a further reason for discarding the respondents' protest on the ground of alternative remedy, which is generally an inappropriate consideration at a final hearing but is a live issue in this case as t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e second petition on merits and in the resultant appeal by special leave, the question of constructive res judicata arose. The Supreme Court noticed an earlier Constitution Bench judgment in Amalgamated Coalfields Ltd v. Janapada Sabha, Chhindwara AIR 1961 SC 964 and held that the ratio therein was inapplicable to the case before the subsequent Constitution Bench. 56. At the time that the appeal in Amalgamated Coalfields Ltd. was argued before the Supreme Court, some new points of law were sought to be raised but the Supreme Court did not allow them to be made on the ground that they ought to have been urged at an earlier stage. When a similar order was passed against the said company for a subsequent year, the said additional points were included by it in its petition before the High Court. The High Court held that it was not open to the Company to raise such points on the ground of constructive res judicata. The company took such order to the Supreme Court in appeal by special leave. The Supreme Court held that the High Court was in error in holding that the principle of constructive res judicata precluded the Company from raising the additional points. Accordingly, the merits....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with the finality which must attach to the decisions of this Court as between the Parties before it in respect of the subject-matter directly covered by the said decision. Considerations of public policy and the principle of the finality of judgments are important constituents of the rule of law and they cannot be allowed to be violated just because a citizen contends that his fundamental rights have been contravened by an impugned order and wants liberty to agitate the question about its validity by filing one writ petition after another. 58. The bank relies on another judgment reported at (2005) 1 SCC 444 (U.P. State Road Transport Corporation v. State of U.P.) for the proposition that the applicability of the doctrine of constructive res judicata had been extended to statutory violations challenged by way of proceedings under Article 226 of the Constitution. The complex facts in that case need to be seen for the law laid down therein to be best appreciated. 59. By an order made in Shri Chand v. Govt. of U.P. (1985) 4 SCC 169 the Supreme Court quashed a scheme that the Uttar Pradesh State Road Transport Corporation had published in 1959 under Section 68C of the Motor Vehicl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... writ petitions before the High Court. The High Court held that the draft scheme of 1986 had lapsed under Section 100(4) of the 1988 Act and it could not be approved or modified and, accordingly, the draft scheme of 1986 and the approved scheme of 1993 as modified by the order impugned in the immediate proceedings were quashed. 60. The Supreme Court held in the judgment now cited by the bank that such issue could not have been raised or revisited by the High Court since it stood concluded by the Supreme Court decision in Ram Krishna Verma. It held that in the judgments of both Ram Krishna Verma and Nisar Ahmad the Supreme Court had opined that the 1986 scheme had not lapsed notwithstanding Section 100(4) of the 1988 Act. It observed that, in any event, the order in Gajraj Singh directed the 1993 notification, which approved the 1986 scheme, to be modified upon taking into account the objections thereto that remained pending. The Supreme Court referred to previous judicial pronouncements on the legal issue and held at paragraph 11, 11. The principle of res judicata is based on the need of giving a finality to judicial decisions. The principle which prevents the same case being....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sively decided - could be taken in this subsequent action, but the grounds missed out or otherwise not taken could not be entertained. If it is the accepted position that inherent lack of jurisdiction would render the act a nullity and such ground could be set up anywhere even collaterally, it would defy logic to not permit a challenge to the validity of the master circular - in furtherance of a ground of inherent lack of jurisdiction - to be now maintained on account of the previous decision which left all questions open. 62. So much for the prelude to the real dispute. Some matters already noticed will again fall for consideration but the basis for assessment thereof will have to be in the context that they next come up. 63. The petitioners have fashioned their attack on the bank's invocation of the master circular and its grievance redressal committee's decision of April 7, 2009 on six major counts. The validity of the master circular is questioned primarily on the principle embodied in the maxim, nemo debet esse judex in propria sua causa (nobody shall be judge of his own cause). The petitioners are aggrieved at the Reserve Bank failing to rein in the private bank....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The petitioners say that it is the third clause which is at the heart of the master circular and such provision is patently arbitrary in that it leaves a borrower and its reputation completely at the mercy of the concerned bank or financial institution. The petitioners claim that the internal remedy to redress a wrong, incorporated in the third sub-clause, is unreasonable and illusory and contemplates only an appeal from Caesar to Caesar's wife which has always been frowned upon. They bring a judgment reported at (1985) 3 SCC 267 (Ram and Shyam Company v. State of Haryana) where, in the a discussion on the efficacy of the alternative remedy cited, the Supreme Court observed since the impugned decision was effectively taken by the Chief Minister of the State, the alternative remedy was illusive and produced those famous words that an "appeal from Caesar to Caesar's wife can only be bettered by appeal from one's own order to oneself." In support of their contention that such a scenario would expose a borrower to a real likelihood of bias, the petitioners rely on another celebrated judgment reported at (1978) 1 SCC 405 (Mohinder Singh Gill v. The Chief Election Commissio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture is not enough: see Reg. v. Camborne Justices, Ex parte Pearce, and Reg. v. Nailsworth Licensing Justices, Ex parte Bird. There must be circumstances from which a reasonable man would think it likely or probable that the justice, or chairman, as the case may be, would, or did, favour one side unfairly at the expense of the other. The court will not inquire whether he did, in fact, favour one side unfairly. Suffice it that reasonable people might think he did. The reason is plain enough. Justice must be rooted in confidence: and confidence is destroyed when right- minded people go away thinking: "The judge was biased." 67. It is submitted that there is no gainsaying that only if a bank or financial institution had internally decided that a borrower would be branded as a willful defaulter would the notice be issued to the borrower for such purpose and the remedy of a representation to the domestic grievance redressal committee would be a facetious exercise in futility. The petitioners exhort that such manifestly unjust procedure would fall foul of Article 14 of the Constitution and rely on the judgment reported at (1978) 1 SCC 248 (Maneka Gandhi v. Union of India) to emphasise....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t-matter, depending on each other, operating together for the same purpose, or otherwise so connected together in meaning, that it cannot be presumed the legislature would have passed the one without the other. The constitutional and unconstitutional provisions may even be contained in the same section, and yet be perfectly distinct and separable, so that the first may stand though the last fall. The point is not whether they are contained in the same section; for the distribution into sections in purely artificial; but whether they are essentially and inseparably connected in substance. If, when the unconstitutional portion is stricken out, that which remains is complete in itself, and capable of being executed wholly independent of that which was rejected, it must be sustained. The difficulty is in determining whether the good and bad parts of the statute are capable of being separated within the meaning of this rule. If a statute attempts to accomplish two or more objects, and is void as to one, it may still be in every respect complete and valid as to the other. But if its purpose is to accomplish a single object only, and some of its provisions are void, the whole must fail un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equire adequate safeguards to be introduced in the procedure so that the person sought to be blacklisted is not condemned unheard. The bank refers to the judgments reported at (1975) 1 SCC 70 (Erusian Equipment and Chemicals Ltd. v. State of West Bengal) and (1989) 1 SCC 229 (Raghunath Thakur v. State of Bihar) that provide that since an order of blacklisting has civil consequences for the future business of the person affected, he has to be afforded a right to make a representation and be heard before the order can be made. The bank says that usually blacklisting is also done by the same department or organisation with whom the person sought to be blacklisted engages in business. It is the bank's case that if a government department can have the right to blacklist a contractor, subject to hearing him, a bank may also effectively blacklist one of its borrowers by holding him to be a willful defaulter under the master circular. The bank submits that the bank has an inherent right to brand one of its customers as a defaulter and that the consequence of such branding has been widened under the Reserve Bank's master circular should, in principle, not make any difference. 72.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a list of willful defaulters as defined is per se justified. One scheme or other in this regard has existed from 1994. The Master Circular has been issued to remove loopholes and rectify defects and problems noticed in the past. It is a policy decision, which has been taken after careful thought, past experience, problems faced by the banks and financial institutions.... 74. On such aspect of the matter the Reserve Bank rests its case with that trendy incantation that prompts a more deferential moderation by courts: that the making of the master circular is a matter of policy in a crucial area of the economic activity. The central bank claims that such policy decision is based on the bitter recovery experience of banks and financial institutions and has the technical backing of expert studies and reports. It refers to a judgment reported at (2003) 4 SCC 289 (Federation of Rly Officers' Assn v. Union of India) for the proposition that the scope of judicial review is extremely restricted in matters of policy evolved by the government. 75. The limited challenge to the validity of the master circular does not appeal. The only ground put forth by the petitioners is the apparen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessment of the creditworthiness (and, as a corollary, the lack of it) of a borrower (which includes a client in the relevant statute) by a credit institution (which includes banks and financial institutions in such enactment) is subject to statutory arbitration under the aegis of the Reserve Bank by virtue of Section 18 of the Credit Information Companies (Regulation) Act, 2005. 78. Though the petitioners indicated in the introductory submission that there was another dimension to their challenge to the validity of the master circular if such circular were used to rope in any person having other permitted business dealings with a bank but not being a person who had availed of credit facilities from the bank, the petitioners appear to have reserved the ammunition for use in their foremost contention that in the petitioner company not being a borrower of the bank, the master circular could not have been invoked against it. 79. The second count of challenge on merits - the first of three successive seemingly minor charges - is of the Reserve Bank not harnessing the private bank as it shot like a loose cannon down a mountain slope to denigrate the petitioner company and sully....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., along with the Schedule thereto, and the Deal Confirmations dated September 6, 2007 and June 26, 2007 are valid and binding on the Respondent? ) Whether the Claimant is entitled to specific performance by the Respondent of the ISDA Master Agreement dated January 17, 2006 and Transaction 1 and Transaction 2 entered into there under? ) Whether the Respondent is liable to pay to the Claimant the amount of USD. 1,980,000/- (equivalent to INR. 8,34,72,600/- as on June 10, 2008) under Transaction 1 as claimed by the Claimant in its particulars of Claim? ) Whether the Respondent is liable to pay to the Claimant such further amounts that may become due under Transaction 1 and/or Transaction 2 on the various statement dates there under, as claimed by the Claimant in its Particulars of Claim, as amended from time to time? ) Whether the Respondent is liable to pay interest to the Claimant at the default rate of interest as applicable from time to time, on the unpaid/claimed amounts, from the respective due dates of payment until payment and/or realization thereof? If so, at what rate/rates? 82. The bank retorts that there is no virtue in denying a legitimate claim for denial&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sert that this was indispensable if the process had to progress to the second stage and was a precondition to the assumption of jurisdiction by the grievance redressal committee. They point out that even the second limb of Clause 3(ii) of the master circular was observed in the breach upon the petitioner company not being favoured with any clearly spelt-out decision of the initial committee. The company, they lament, was not given any insight of what weighed with the initial committee to enable the company to address the misgivings and allay the misapprehension. 85. The charge amounts to an allegation of violation of the principles of natural justice. Not every attribute of the rules of natural justice needs to be inflexibly complied with in every instance, nor will the writ court make such a rigorous demand. What is imperative is that there has to be substantial compliance with the rules of fairplay that any form of justice would demand. If it appears that the authority discharging a quasi-judicial function enters upon the matter with an element of predisposition, then the course of action that it charts out and the reasons that it ultimately gives call for a more stern examina....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t was immediate and as part of the committee he had to assess his own case for selection. Though he opted out of the deliberations when his candidature was deliberated upon, it was felt that his presence on the committee vitiated the process. Paragraph 15 of report brings out the facts and the principle that was enunciated: 15. It is unfortunate that Naqishbund was appointed as one of the members of the selection board. It is true that ordinarily the Chief Conservator of Forests in a State should be considered as the most appropriate person to be in the selection board. He must be expected to know his officers thoroughly, their weaknesses as well as their strength. His opinion as regards their suitability for selection to the All India Service is entitled to great weight. But then under the circumstances it was improper to have included Naqishbund as a member of the selection board. He was one of the persons to be considered for selection. It is against all canons of justice to make a man judge in his own cause. It is true that he did not participate in the deliberations of the committee when his name was considered. But then the very fact that he was a member of the selection b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. In my opinion, however, in the facts of the case, it cannot successfully be contended that there is breach or nonobservance of natural justice by the Committee. Reading of the reports makes it clear that adequate opportunity had been afforded to the petitioners and thereafter the action was taken. Notices were issued to the Members, CDs were supplied to them, evidence of witnesses was recorded, defence version was considered and "findings and conclusions" were reached. 92. The bank says that the petitioner company did not assert in its voluminous correspondence either that Mr. Sathe was personally inimical to the company or that his being on the committee was a matter of concern to the company. The bank argues that the petitioner company took a chance with eyes wide open and should not be permitted to question the gentleman's presence on the committee. The bank contends that despite the company's reservation on certain other scores, it wholeheartedly submitted to the grievance redressal committee's jurisdiction and is deemed to have waived any objection as to the composition thereof. The bank refers to a judgment reported at AIR 1957 SC 425 (Manak Lal v. Dr. Prem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany's several representations of the gentleman's presence being of any consequence to the company. The petitioners have not demonstrated that he bore any personal animosity against the company. His mere association on behalf of the bank in proceedings against the petitioner company would not warrant such challenge to be received on merits. In any event, in the company not having taken such protest before the committee or even in the detailed submission made immediately upon the conclusion of the hearing before the committee, it had voluntarily relinquished a right that it ought to have been aware of and cannot now be permitted to resurrect it. 95. Further, if the petitioner company had aired its misgiving on such account at or prior to the hearing, or even immediately thereafter, it would have afforded the bank or its committee to take care of the perceived shortcoming. It would have been entirely different if the petitioner company had cited good grounds for Mr. Sathe's exclusion from the committee and the committee had still persisted with him thereon. But the petitioner company did not afford the grievance redressal committee an opportunity to right the wrong, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fers to "payment/ repayment obligations to the lender." They submit that the expression "lender" is not to be equated with creditor and, in the context of the circular, banks and financial institutions covered thereby would be lenders if the relevant agreements involved an actual flow of funds from the banks and financial institutions to a customer against a promise of future repayment thereof with appropriate interest. The petitioners suggest that the respondents' enthusiasm in the use of "payment/ repayment" in each of the situations covered by the definition of willful default is misplaced since repayment would point to the return of the fund made available by a bank or financial institution to its customer and payment would point to the interest to be earned on the credit facilities granted. 99. The petitioners refer to the penal measures detailed under Clause 2.5 of the master circular. The four measures suggested, according to the petitioners, contemplate a lender-borrower relationship in each case. The first penal action recommended is that no additional facilities should be granted by any bank or financial institution to the listed willful defaulter; the second sugge....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nk Ltd. 13th floor, Nariman Bhavan, 227-Nariman Point, Mumbai-400 021 (herein after referred to as 'KMBL') are pleased to inform Hindustan National Glass & Industries Limited (herein after referred to as 'the borrower') that the following facility has been sanctioned to you. The facility is subject to compliance with conditions stated hereunder. This letter and Annexures supercede all our oral and written communication on this subject: Limits INR 2,00,00,000/- (Rupees Two Crores only) Validity of Facility Forward Contracts: Maximum 1 Year Derivative : Maximum 3 years with 1 year break clause Documentation 7. The borrower to furnish proof of underlying exposure which is sought to be hedged, in a form acceptable to KMBL. Other conditions 8. Undertaking from the borrower to cash collateralise the negative MTM (over & above the limit of INR 200 Las) every 15 days 9. The cash collateralisation shall be in the form of Fixed Deposit under lien to KMBL. 103. The bank places the company's acknowledgement of such sanction letter and its unreserved acceptance of the terms and conditions contained therein. One such acknowledgement would appear from a writing executed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....est that the lender-borrower notion in banking business has to be understood in the context of various circulars issued by the Reserve Bank and, in particular, in the light of the concept of non-performing assets which was introduced nearly 10 years back and has now been refined and redefined. 106. The Reserve Bank relies on its circular of August 30, 2001 noticed by the Supreme Court in Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311 where a non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained 'past due' for a specified period of time. Over the years the period specified has been reduced in a phased manner. The Reserve Bank says that even its circular of 2001 included, within the definition of NPA, any amount receivable by a bank or financial institution which remained overdue for a period of more than 180 days. The respondent banks suggest that if any "receivable" to a bank could be brought within the definition of NPA, such receivable could also be made the basis for invoking the master circular. The respondent banks have brought several other circulars of the Reserve Bank. A ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....remost area of business. The private bank claims that the terms of the arrangement between the bank and the petitioner company were fluid in concept; they envisaged payment from one party to the other depending on the exchange fluctuations, but also contemplated a system of deferred payment to be availed of by the company subject to the limits specified in individual cases. The bank explains that if the company had made timely payments then a lender-borrower relationship would not have arisen, but in the company availing of the deferred payment facility it became a borrower to the extent of its liability. The bank submits that modern banking is not as rigid as courts would remember it to be: a transaction not carrying a lender-borrower flavour at the inception could later become a borrowal account by the conduct of the customer. This, the bank says, is what happened in the petitioner company's case and is the bank's fundamental basis for viewing the relationship from the lender-borrower standpoint and invoking the master circular. 108. The bank relies on a Reserve Bank letter of October 13, 2008 circulated to all commercial banks laying down prudential norms for off-bala....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which provides, "Prudential Norms for Off-balance Sheet Exposures of Banks Please refer to our circular DBOD. No. BP.BC.57/21.04.157/2008-09 October 13, 2008 on the captioned subject. 2. In terms of para 2.1(i) of the aforesaid Circular, any receivable representing positive mark-to-market value of a derivative contract, if overdue for a period of 90 days or more, is required to be treated as non- performing asset and also makes all other funded facilities granted to the client as non-performing asset, following the principle of borrower-wise classification. 3. On a review of the matter, it has now been decided to confine the applicability of the principle of borrower-wise asset classification to only the overdues arising from forward contracts and plain vanilla swaps and options. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and is / becomes receivable from the client, should be parked in a separate account maint....
X X X X Extracts X X X X
X X X X Extracts X X X X
....truments as may be specified by the Bank from time to time; -V. Transactions in derivatives.-(1) Notwithstanding anything contained in the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or any other law for the time being in force, transactions in such derivatives, as may be specified by the Bank from time to time, shall be valid, if at least one of the parties to the transaction is the Bank, a scheduled bank, or such other agency falling under the regulatory purview of the Bank under the Act, the Banking Regulation Act, 1949 (10 of 1949), the Foreign Exchange Management Act, 1999 (42 of 1999), or any other Act or instrument having the force of law, as may be specified by the Bank from time to time. (2) Transactions in such derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of Sub-section (1) were in force at all material times." Credit Information Companies (Regulation) Act, 2005 2. Definitions.-In this Act, unless the context otherwise requires,- (b) "borrower" means any person who has been granted loan or any other credit facility by a credit institution and includes a client of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... transaction. They rely on the bank's understanding of an overdue amount to be an amount due under any credit facility which would imply that non-funded facilities were excluded there from. The petitioners rely on the following passages from the notes appended to the bank's most recent annual financial statement: Definition and classification of non-performing assets (NPA) The Bank classifies its advances into performing and non-performing advances in accordance with extant RBI guidelines. A NPA is defined as a loan or an advance where; interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan; the account remains 'out of order' - in respect of an overdraft/ cash credit (OD/CC); and the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted." Overdue Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank." F. Foreign Currency and Derivative Transactions For the Bank: ... iv. Derivative transactions comprising of swaps and options are disc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he petitioners also reveal their industry in sifting through relevant accounting provisions and the commentaries thereon. They say that a credit facility is quite distinct from any other facility in modern banking practice. The petitioners have 'googled' to obtain some features of the distinction. They refer to Paget's Law of Banking (10th ed.). The petitioners rely on the definition of "credit limit" in P. Ramanatha Aiyar's Advanced Law Lexicon (3rd ed.) appearing at page 1127 of the book: Credit limit. The maximum sum that a person or organization is prepared to lend to another. 117. The petitioners seek to discount the body of banking law and practice cited by the respondent banks on the legal principle that the impugned decision has to sustain itself only by the reasons furnished therein in support thereof and it cannot draw any sustenance from the world of reasons that the order has left out. The petitioners rely on a decision reported at (2005) 12 SCC 508 (Bangalore Development Authority v. R. Hanumaiah) which quotes from Mohinder Singh Gill (supra) at paragraph 56 that held that orders had to stand or fall on the basis of the reasons contained therein a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....having a right to its opinion that the company is a willful defaulter and the bank seeking to use the master circular to lend more acceptability to its opinion that the company is a willful defaulter; and inflicting punishment thereby on the company. 120. The civil consequence that visits a person adjudged to be a willful defaulter under the master circular is serious. It would impinge on the inherent right of a person to carry on business. Even the Reserve Bank is cautious and it advises banks and financial institutions to be judicious in using the master circular. It is imperative then that the class of persons that the master circular seeks to catch in its dragnet is ascertained. 121. The many other circulars, guidelines and law relied upon by the respondent banks now had not been referred to in the decision of April 7, 2009 of the bank's grievance redressal committee. But it would be naive to suggest that the fact that such other body of material now brought to sustain the decision be disregarded because it had not been specifically referred to at paragraph 10 or thereabouts of the decision. The committee opined that the terms "borrower" and "lender" in the relevant c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the weight of the underlying body of thought. 124. Dues in respect of derivative transactions can also be included within the larger basket of NPA; but merely by a virtue of an amount outstanding being regarded as an NPA, it would not make the master circular applicable to the debtor. A debt is certainly an asset and as such it can be brought in within the definition of NPA if it remains unserviced for any length of time. Even otherwise, it is open to the Reserve Bank to specifically include debts due to banks and financial institutions on account of derivative or other transactions within the fold of NPA. But even in the circular on income recognition and related matters of July 1, 2008 that the Reserve Bank has relied on, the essential condition for an account to be treated as an NPA is that it has to be "a loan or an advance." It was only under the circular of October 13, 2008 that derivative transactions were brought into the sweep of NPA accounts; and the other borrowal accounts of the same customer had to be linked such that the entire portfolio of accounts would be NPA. But the subsequent clarification of October 29, 2008 delinked the customer's borrowal accounts fr....