Gujarat High Court Wilful Default Case

C/SCA/645/2014 CAV JUDGEMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

SPECIAL CIVIL APPLICATION NO. 645 of 2014
With
SPECIAL CIVIL APPLICATION NO. 10120 of 2014

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI Sd/-
and
HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/-
================================================================
1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
Yes
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy of the
judgment ?
No
Whether this case in!ol!es a substantial "uestion of law as
to the interpretation of the #onstitution of $ndia% 1&'( or any
order made thereunder ?
No
' Whether it is to be circulated to the ci!il judge ? No
================================================================
IONIC METALLIKS & 3....Petitioner(s)
Versus
UNION OF INDIA & 3....Respondent(s)
================================================================
Appearance:
MR MASOOM K SHAH, ADVOCATE for the Petitioner(s) No. 1 - 4
MR VISHWAS K SHAH, ADVOCATE for the Petitioner(s) No. 1 - 4
MR MITUL SHELAT, ADVOCATE for the Petitioner.
MR S.N.SOPARKAR, SR.ADVOCATE with MR AMAR N BHATT, ADVOCATE
for the Respondent(s) No. 4
MS NALINI S LODHA, ADVOCATE for the Respondent(s) No. 2 - 3
Page 1 of 162
NOTICE SERVED BY DS for the Respondent(s) No. 1
================================================================
#)R*+, HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE J.B.PARDIWALA

Date :09/09/2014

CAV JUDGEMENT
(PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA)
-ince the legal issues raised in both the writ applications
are more or less the same% those were heard together and are
being disposed of by this common judgment.
The challenge in both the abo!e captioned writ
applications is to the legality and !alidity of a +aster #ircular
dated 2nd /uly 2(12 issued by the Reser!e 0an1 of $ndia in
respect of 2willful defaulter2 and the notices were issued by the
respecti!e ban1s% calling upon the petitioners to show-cause as
to why they should not be declared as willful defaulters in
terms of the Reser!e 0an1 of $ndia3s +aster #ircular.
Special Civil Application No.!" o# $%&! '
The petitioner no.1 is a proprietary firm. The petitioner
no.2 is a company registered under the $ndian #ompanies *ct%
1&'4% ha!ing its Registered )ffice within the -tate of 5ujarat.
The petitioner no.3 is the 6irector of the petitioner no.2
#ompany and the petitioner no. is the 5uarantor and also a
6irector of the Petitioner no.2 #ompany.
The petitioners a!ailed of a loan facility from the
Page 2 of 162
respondent no.2 Punjab 7ational 0an1. The respondent no.2
0an1 noticed that the loan account of the petitioners was a
7on8Performing *sset 97P*: since 3(th /une 2(12 with the
outstanding of Rs.1(2; lac 9as on the date of the 7P*:
including the interest at the applicable rate.
6espite regular reminders from the ban1 for payment of
the dues% no steps were ta1en by the petitioners in that regard.
Therefore% the respondent no.2 0an1 issued a show-cause
notice dated 1&th <ebruary 2(13 followed by a second show-
cause notice dated 1th +ay 2(13 and a final notice dated =th
/anuary 2(1 on the premise that the petitioners had
defaulted in repayment of the loan amount and the funds
borrowed from the 0an1 were siphoned off and not used for
the purpose for which the amount of the loan was disbursed%
for which the petitioners were called upon to show-cause as to
why they should not be declared as 2willful defaulters2 in terms
of the R0$ +aster #ircular 60)6 7o.#$68
0#.1>2(.14.2((3>2(11812.
-uch action of the 0an1 is the subject matter of challenge
in the petition including a prayer to declare the R0$ +aster
#ircular dated 2nd /uly 2(12 referred to abo!e as ultra vires
the #onstitution of $ndia and>or the -ecuriti?ation and
Reconstruction of <inancial *ssets and @nforcement of -ecurity
$nterest *ct% 2((2 9*ct 7o.' of 2((2: and>or the Reser!e 0an1
of $ndia *ct% 1&3 and>or the 0an1ing Regulation *ct% 1&&
and>or the Reco!ery of 6ebts 6ue to 0an1 and <inancial
$nstitutions *ct% 1&&3 and>or the #redit $nformation #ompanies
9Regulation: *ct% 2((' and>or the $ndian #ontract *ct.
Page 3 of 162
Special Civil Application No.&%&$% o# $%&! '
The petitioners a!ailed of the facility of the Aome -a!er
*ccount vide sanction letter dated 3(th -eptember 2(1( to the
tune of Rs.3%'%=;%&((>8 in *ccount 7o.=111;2 from the
respondent no.2 B -tandard #hartered 0an1. The petitioners
a!ailed one more facility of the Aome -a!er *ccount by
sanction letter dated 3(th -eptember 2(1( of Rs.1%'%12%1((>8
vide *ccount 7o.=13=&& from the respondent no.2 8
-tandard #hartered 0an1. The *ccount 7o.=13=&& was
declared as 7P* on 1st 6ecember 2(13 whereas the *ccount
7o.=111;2 was declared as 7P* on 1(th /anuary 2(13.
)n 3rd *pril 2(1% the petitioners addressed a letter to
the respondent no.2 0an1 re"uesting for a closure of both the
accounts.
)n 2(th +ay 2(1% the petitioners were ser!ed with the
notices under -ection 1392: of the -ecuriti?ation and
Reconstruction of <inancial *ssets and @nforcement of -ecurity
$nterest *ct% 2((2.
)n 2(th /une 2(1% the petitioners were ser!ed with the
impugned notices under the R0$ #ircular 60)6
7o.#$6.0#.1>2(.14.2((3>2(11812 dated 1st /uly 2(12% calling
upon them to show-cause as to why they should not be
declared as the willful defaulters. The petitioners replied to
the said notices on 1st /uly 2(1.
$n the aforesaid bac1ground% the petitioners ha!e prayed
to declare the R0$ +aster #ircular dated 1st /uly 2(11 as ultra
Page 4 of 162
vires the #onstitution of $ndia and !arious other enactments.
The petitioners ha!e also prayed that the notice dated 2(th
/une 2(1 issued by the Respondent no.2 0an1 under the R0$
+aster #ircular be also "uashed and set-aside.
S()*i++ion+ on )e,al# o# t,e petitione-+ '
+r.Cishwas -hah and +r.+itul -helat% the learned
ad!ocates appearing for the respecti!e petitioners made the
following submissions ,
The R0$ +aster #ircular dated 1st /uly 2(11 as well as the
R0$ +aster #ircular dated 2nd /uly 2(12 in respect of the willful
defaulters and the instructions contained therein are beyond
the legislati!e competence of the R0$. The circular does not
refer to any pro!ision of law under which it has been issued.
$t has been submitted that the stance of the Reser!e
0an1 of $ndia that issuance of the +aster #ircular is in eDercise
of the powers conferred under -ection 21 and -ection 3'8* of
the 0an1ing Regulation *ct% 1&&% is completely misplaced and
erroneous. To fortify such submission% strong reliance has
been placed on the decision of the -upreme #ourt in the case
of $ndian 0an1s2 *ssociation% 0ombay and others !.
+>s.6e!1ala #onsultancy -er!ice and others% 92((:11 -## 1.
The impugned pro!isions of the #ircular are substanti!e
pro!isions affecting the rights of the citi?ens. The substanti!e
pro!isions can only be by way of a legislati!e enactment and
not by eDercise of powers to issue directions.
Page 5 of 162
$t is submitted that to prescribe a particular conduct by a
borrower as a Ewillful defaultF% to impose the penalty for such a
Ewillful defaultF and to prescribe a procedure for adjudication
of the lis regarding the Ewillful defaultF are beyond the scope
and ambit of -ection 3'9*: of the 0an1ing Regulation *ct%
1&&.
The #hief 5eneral +anager has no power% authority and
locus to issue the +aster #ircular% howe!er% the circular issued
by the #hief 5eneral +anager would not constitute a policy
decision under -ections 21 and 3'* of the 0an1ing Regulation
*ct% 1&&. The said #ircular is re"uired to ha!e the phrase Ein
public interestF or Ein interest of depositorsF or Ein interest of
ban1ing policyF and should indicate rele!ant materials and
reasons that the #ircular was being issued after considering
the interest of all the abo!e and for such reasons.
$n support of such submission% strong reliance has been
placed on a decision of the Garnata1a Aigh #ourt in the case of
@.-athyanarayanan and others !. Reser!e 0an1 of $ndia and
others% reported in 92((2:112 #ompany #ases 2;2.
The impugned #ircular is !iolati!e of *rticle 1 of the
#onstitution as it has the effect of almost blac1listing the
petitioners from obtaining any new loan from any other ban1
or financial institution and it attaches a social stigma on the
6irectors who may not be concerned in any manner as regards
the day8to8day affairs and management of the company.
$t is submitted that none of the pro!isions of the Reser!e
0an1 of $ndia *ct or the 0an1ing Regulation *ct% 1&& confers
any power upon the Reser!e 0an1 of $ndia to impose any
Page 6 of 162
penalty relating to a particular conduct of a borrower. The
circular confers uncanali?ed% unbridled and untrammeled
power upon the ban1s to decide the future of any borrower
and ma1es the ban1 a judge in its own cause and also the
decision whether the other ban1s should lend money to the
borrower declared as a willful defaulter.
*ccording to the learned ad!ocates appearing on behalf
of the petitioners the policy decision of the Reser!e 0an1 of
$ndia in the form of a +aster #ircular is nothing but a direct
infringement of *rticle 1&91:9g: of the #onstitution which
pro!ides for right to trade% business or profession. * person
may fail in one business% but he cannot be debarred or
prohibited from doing any other business for which he may
ha!e to raise the necessary funds by obtaining loan from a
ban1 or any other financial institution.
The #ircular pre8supposes a default% which is otherwise
re"uired to be pro!ed in accordance with law before the 6ebts
Reco!ery Tribunal established under the Reco!ery of 6ebts
6ue to 0an1s and <inancial $nstitutions *ct% 1&&3 9*ct
7o.'1>1&&3: or any other competent forum. The word EdebtF is
defined under -ection 29g: of the R60$ *ct% 1&&3. The
"uestion whether there eDists any debt or not is a "uestion the
ban1 is obliged to pro!e and satisfy before the 6ebts Reco!ery
Tribunal under the R60$ *ct% 1&&3% against the borrower. $t
has been submitted that the impugned circular which see1s to
delegate the function of ma1ing a judicial in"uiry and issue a
declaration regarding the conduct of a borrower as a Ewillful
defaultF entails serious conse"uences. -uch adjudication is
essentially judicial in nature as it in!ol!es adjudication of a lis.
Page 7 of 162
-uch an essential primary function cannot be delegated to a
non8judicial authority li1e a pri!ate ban1 or e!en a nationali?ed
ban1.
$n support of such submission% strong reliance has been
placed on the decision of the -upreme #ourt in the case of
Ram Prasad 7arayan -ahi and another !. -tate of 0ihar and
others% *$R 1&'3 -# 21'% and -adasib Pra1ash 0rahmchari%
Trusty of +ohipra1ash +ath !. -tate of )rissa% *$R 1&'4 -#
32.
The pro!isions of the impugned circular !iolate the
doctrine of Edue processF and the concept of a Ejust% fair and
reasonable lawF. The doctrine of due process is enshrined in
*rticle 21 of the #onstitution of $ndia. $n support of such
submission% strong reliance has been placed on the decisions
of the -upreme #ourt in the case of 9i: 6irectorate of Re!enue
and another !. +ohammed 7isar Aolia% 92((=:2 -## 3;(H 9ii:
-tate of Punjab !. 6albir -ingh% 92(12:3 -## 34H 9iii: -tate of
Garnata1a !. -hri Rameshwara Rice +ills Thirthahalli% 91&=;:2
-## 14( and 9i!: +>s./.5.@ngineers P!t. Ltd. !. Inion of $ndia
and another% 92(11:' -## ;'=.
C,allen.e to t,e vali/it0 o# t,e Notice '
*part from the challenge to the #onstitutional !alidity of
the +aster #ircular issued by the Reser!e 0an1 of $ndia% the
petitioners ha!e also challenged the proposed action on the
part of the 0an1.
$t has been !ehemently submitted by the learned
Page 8 of 162
ad!ocates appearing on behalf of the petitioners that ha!ing
regard to the contents of the notice it could be said that the
0an1 has already ta1en a decision to declare the petitioners as
willful defaulters without disclosing any reasons in the show-
cause notice and the show-cause notice is also bereft of the
necessary particulars and details. $n the absence of the
necessary details and the reasons% the petitioners would not be
able to effecti!ely put forward their case.
+r.+itul -helat% the learned ad!ocate appearing for the
petitioners of -pecial #i!il *pplication 7o.1(12( of 2(1%
submitted that although the impugned action is at the instance
of a pri!ate ban1% !i?. -tandard #hartered 0an1% yet the same
figures as a scheduled ban1 in the -econd -chedule of the
Reser!e 0an1 of $ndia *ct% 1&3% and therefore% would be
amenable to the writ jurisdiction of this #ourt under *rticle 224
of the #onstitution so far as the challenge to the notice is
concerned.
$n support of his submission that the -tandard #hartered
0an1 is amenable to the writ jurisdiction of this #ourt under
*rticle 224 of the #onstitution being a -tate or an
instrumentality of a -tate within the meaning of *rticle 12 of
the #onstitution of $ndia% +r.-helat has placed reliance on the
following decisions ,
9i: -hri *nandi +u1ta -adguru -hree +u1tajee
Candasjiswami -ur!arna /ayant -mara1 Trust Cs.
C.R. Rudani% *$R 1&=& -# 1;(;H
9ii:Praga Tools #orporation !. #.*. $manual and
others% *$R 1&4& -# 13(4H
Page 9 of 162
9iii: *peD @lectricals !. $#$#$ 0an1 Ltd.% 2((392:
5LR 1;='H
9i!: +>s *8)ne +ega +art P!t. Limited and others
!. A6<# 0an1 and another% 92(13:14& Punjab
Law Reporter 4==H
9!: +>s. $nder -urgical !. Inion of $ndia and others%
2(192: Punjab Law Reporter 3;;.
$n such circumstances referred to abo!e% it has been
prayed that the petitions merit consideration and the reliefs
prayed for in the respecti!e petitions be granted.
Stance o# t,e Re+e-ve Ban1 o# In/ia '
$n response to the notice ser!ed upon the Reser!e 0an1
of $ndia% an affida!it8in8reply has been filed in the -pecial #i!il
*pplication 7o.4' of 2(1 on behalf of the same duly sworn
by its *ssistant 5eneral +anager% 6epartment of 0an1ing
-uper!ision% Reser!e 0an1 of $ndia% *hmedabad. The stance of
the Reser!e 0an1 of $ndia as could be deduced from the
a!erments made in the reply is thus ,8
The petition is not maintainable against the Reser!e
0an1 of $ndia. There is no !iolation of any fundamental% legal
or statutory rights of the petitioners by the R0$. The R0$ has
been constituted by the Reser!e 0an1 of $ndia *ct% 1&3% inter
alia% for regulating the issue of ban1 notes and for 1eeping of
reser!es with a !iew to securing monetary stability in $ndia and
generally to operate the currency and credit system of the
country to its ad!antage. The R0$ acts as the central ban1 of
the country% eDercises super!isory and regulatory powers as
Page 10 of 162
contemplated under the Reser!e 0an1 of $ndia *ct% 1&3 9R0$
*ct: as well as the 0an1ing Regulation *ct% 1&& 90R *ct:. The
R0$ has been conferred with the power to determine policy in
relation to ad!ances to be followed by ban1ing companies. The
R0$ is conferred with wide powers for issue of
directions>guidelines to ban1s under the pro!isions of the
0an1ing Regulation *ct% 1&&. $t is the duty of the R0$ to
ensure de!elopment of ban1ing in $ndia in an orderly manner.
*s the ban1ing regulator and super!isor in the country% the R0$
has been issuing guidelines>directions to ban1s from time to
time% and the ban1s are duty bound to implement the same.
-ection '9ca: of the 0an1ing Regulation *ct defines
Eban1ing policyF as any policy which is specified from time to
time by the Reser!e 0an1 of $ndia in the interest of the
ban1ing system or in the interest of monetary stability or
sound economic growth% ha!ing due regard to the interests of
the depositors% the !olume of deposits and other resources of
the ban1 and the need for e"uitable allocation and the efficient
use of these deposits and resources. -ection 4 of the 0an1ing
Regulation *ct specifies the forms of business in which
ban1ing companies may engage.
$n terms of -ection 21 of the 0an1ing Regulation *ct%
where the R0$ is satisfied that it is necessary or eDpedient in
the public interest or in the interests of depositors or ban1ing
policy so to do% it may determine the policy in relation to the
ad!ances to be followed by the ban1ing companies generally
or by any ban1ing company in particular and the concerned
ban1ing companies shall be duty bound to follow the policy so
determined.
Page 11 of 162
$n terms of -ection 22 of the 0an1ing Regulation *ct% no
company can carry on ban1ing business in $ndia% unless it
holds a license issued in that behalf issued by the R0$. $n
terms of -ection 229: of the 0an1ing Regulation *ct% the R0$
can cancel the license of the ban1ing company. $n terms of
-ection 3' of the 0an1ing Regulation *ct% the R0$ has the
power to conduct statutory inspection of any ban1ing company
or cause a scrutiny of the affairs of a ban1ing company and its
boo1s of accounts.
The R0$ has the powers to issue directions under -ection
3'* of the 0an1ing Regulation *ct to the ban1ing companies
generally or to any ban1ing company in particular in public
interest or in the interest of the ban1ing policy or to pre!ent
the affairs of the ban1ing company being conducted in a
manner detrimental to the interest of its depositors or in a
manner prejudicial to the interest of the ban1ing company. The
0an1ing Regulation *ct en!isages action to be ta1en by the
R0$ when R0$ is satisfied that circumstances warrant such
action. -ection 3491: of the 0an1ing Regulation *ct empowers
the R0$ to caution or prohibit ban1s against entering into
certain transactions and generally gi!e ad!ice to any ban1.
*s regards the issuance of directions>guidelines> circulars
etc. by the R0$% the necessary actions as empowered under the
law and as considered appropriate and essential in a gi!en
situation ha!e always been issued from time to time 1eeping
in !iew the larger interest of a ban1ing company% its depositors
and the ban1ing sector as a whole.
Page 12 of 162
The former <inance +inister% in his budget speech in
<ebruary 1&&% had announced that in order to alert the ban1s
and financial institutions and put them on guard against the
borrowers who had defaulted in their dues or other lending
institutions% the R0$ was putting in place arrangements for
circulating amongst the ban1s>financial institutions% the names
of defaulting borrowers abo!e a threshold limit. The objecti!e
of putting such a reporting mechanism in place was to arrest
the increase of 7on8Performing *ssets of the ban1s. Ae had
further mentioned that the R0$ would also publish a list of
defaulting borrowers against whom suits had been filed by
ban1s and <$s.
$n *pril 1&&% the Reser!e 0an1 of $ndia framed a scheme
of 6isclosure of $nformation on 6efaulting 0orrowers of 0an1s
and the <inancial $nstitutions 9<$s: for collection>dissemination
of information from>to Eban1ing companiesF. The Eban1ing
companyF for the purpose also includes the Efinancial
institutionsF that may be notified by the #entral 5o!ernment
in this behalf. Inder the -cheme% the ban1s and the notified
<$s were ad!ised on 23rd *pril 1&& to furnish to the R0$ the
prescribed details of defaulting borrowers with outstanding
amount 9both funded and non8funded: of one crore and abo!e
which were classified as J6oubtful3 and>or JLoss3 and suit filed
accounts on half yearly basis 9-eptember and +arch:. The
-cheme had the following objecti!esH
i: To alert the ban1s and <$s and to put them on guard
against the borrowers who had defaulted in their
dues to other lending institutions.
Page 13 of 162
ii: To ma1e public the name of the defaulting
borrowers against whom suits had been filed by the
ban1s><$s.
*t a meeting con!ened by the #entral Cigilance
#ommission with the ban1ers on 2th 7o!ember 1&&=% it was
decided that the ban1s would report all cases of willful default
of Rs.2' lac and abo!e to the R0$% which in turn% would
circulate such lists to all ban1s on a "uarterly basis. Pursuant
to the instructions of the #entral Cigilance #ommission% the
R0$ introduced a scheme under which ban1s and notified *ll
$ndia <inancial $nstitutions were re"uired to submit to the R0$
the details of willful defaulters with outstanding of Rs.2' lac
and abo!e. The -cheme came into force with effect from 1st
*pril 1&&&. *ccordingly% ban1s and financial institutions started
reporting such cases of willful defaults which occurred or were
detected after 31st +arch 1&&& on a "uarterly basis to the R0$.
Ta1ing into consideration the concern eDpressed o!er the
persistence of the Jwillful default3 in the financial system in the
=th Report of the Parliament3s -tanding #ommittee on <inance
9-tanding #ommittee:% the R0$% in consultation with the
5o!ernment of $ndia% constituted a Wor1ing 5roup on Willful
6efaulters 9W5W6: under the #hairmanship of -hri -.-.Gohli%
the then #hairman of the $ndian 0an1s3 *ssociation in +ay
2(11 for eDamining some of the recommendations of the =th
Report on the Parliament3s -tanding #ommittee on <inancial
$nstitutions. The 5roup submitted its report in 7o!ember 2((1.
The recommendations of the Wor1ing 5roup of Willful
6efaulters were further eDamined by an $n8Aouse Wor1ing
5roup constituted by the R0$. *ccordingly% the ban1s>financial
Page 14 of 162
institutions were ad!ised on 3(th +ay 2((2 for
implementation of such recommendations with immediate
effect.
Pending the passing of the legislation in respect of #redit
$nformation #ompanies% the R0$% in terms of its circular 60)6
7o.6L.0#.11>2(.14.((1>2((18(2 dated th /une 2((2% ad!ised
the ban1s and financial institutions to submit a list of willful
defaulters 9of suit filed accounts: of Rs.2' lac and abo!e as on
31st +arch 2((3 onwards% to the #redit $nformation 0ureau
9$ndia: Ltd. 9hereinafter referred to as E#$0$LF: only and not to
the R0$. The R0$ continues to disseminate eDclusi!ely to the
ban1s and financial institutions for their confidential use the
credit information regarding willful defaulters of Rs.2' lac and
abo!e 9non8suit filed accounts: in a consolidated manner as
reported for the purpose by the ban1s and financial
institutions.
The Reser!e 0an1 has been issuing !arious circulars from
time to time to the scheduled commercial ban1s and *ll $ndia
7otified <inancial $nstitutions with regard to dissemination of
credit information pertaining to the willful defaulters for
cautioning the ban1s and the financial institutions including
action re"uired to be ta1en against the willful defaulters. *ll
these circulars were consolidated in the +aster #ircular on
Willful 6efaulters dated 1st /uly 2(13 9+aster #ircular: issued
by the R0$. The +aster #ircular was prepared to ensure that
all the eDisting instructions on the subject were incorporated
and consolidated in a single document and are a!ailable for
the use of the ban1s and the financial institutions as also on
the website of the R0$. The #ircular on Willful 6efaulters has
Page 15 of 162
been issued by the R0$ under -ections 21 and 3'* of the
0an1ing Regulation *ct% 1&& and are mandatory and binding
on the ban1s.
The +aster #ircular on Willful 6efaulters contains
definition of the term Ewillful defaulterF and it also pro!ides
guidance as to how the terms Edi!ersion of fundsF and
Esiphoning of fundsF are to be construed in the case of Ewillful
defaultF. The +aster #ircular specifically re"uires the ban1s
and financial institutions 9<$s: to put in place a transparent
mechanism for the entire process so that the pro!isions of the
+aster #ircular are not misused and the scope of the
discretionary powers conferred upon the ban1s and <$s are
1ept to the barest minimum. The +aster #ircular also re"uires
the ban1s and <$s to ensure that a solitary or isolated instance
is not made the basis for imposing any penalty on the willful
defaulters. The +aster #ircular clearly prescribes the
measures re"uired to be adopted by the ban1s and <$s in
identifying and reporting the instances of willful default.
Paragraph 3 of the +aster #ircular stipulates that the decision
to classify a borrower as willful defaulter should be entrusted
to a committee of higher functionaries of the ban1><$
concerned headed by the @Decuti!e 6irector and consisting of
two 5+s>65+s as decided by the 0oard of the 0an1><$.
<urther% the decision ta1en on classification of the willful
defaulters should be well documented and supported by
re"uisite e!idence and should clearly spell out the reasons for
which the borrower has been declared as willful defaulter in
terms of the guidelines issued by the 0an1. The ban1><$ is also
re"uired to ad!ise the borrower concerned about the proposal
to classify him as willful defaulter along with the reasons
Page 16 of 162
therefor. The ban1><$ is also re"uired to pro!ide a reasonable
time to the borrower for ma1ing representation against the
decision to a committee headed by the #hairman and
+anaging 6irector of the ban1><$ concerned. The 0an1 has
prescribed a detailed procedure for classification of a particular
borrower as a willful defaulter and such classification is
re"uired to be done by the higher authorities in the ban1><$
concerned with a second screening at the le!el of the highest
authority when a representation is made by the borrower. The
procedure prescribed by the 0an1 pro!ides ample opportunity
to the borrower to present their case before the highest
authorities in the ban1><$ concerned before a decision is ta1en
on his classification as a willful defaulter.
The process listed out in the +aster #ircular has been
carefully designed by a body of eDperts. The objecti!e is to
built up an ade"uate% comprehensi!e and reliable information
system on borrowers so that such willful defaulters are barred
from further institutional credit in terms of the penal measures
listed out therein. The +aster #ircular pro!ides at the end of
Para 2.' that B
it would be imperative on the part of the banks and FIs
to put in place a transparent mechanism for the entire
process so that the penal provisions are not misused and
the scope of such discretionary powers are kept to the
barest minimum. It should also be ensured that a
solitary or isolated instance is not made the basis for
imposing the penal action.
The +aster #ircular sets out the broad guidelines and the
ban1s><$s are eDpected to follow them dealing with indi!idual
cases. The +aster #ircular ta1es e!ery possible care to ma1e
Page 17 of 162
the process transparent and objecti!e. Para 3 of the +aster
#ircular prescribes the broad framewor1 within which the
ban1s><$s are mandated to constitute and operate the
5rie!ance Redressal #ommittees% lea!ing certain amount of
fleDibility for each ban1s><$s to prescribe its detailed process% if
found necessary% before declaring its borrower as a willful
defaulter. <urther% the mechanism pro!ided under para 3
re"uires in!ol!ement of higher functionaries so that an
objecti!e !iew is ta1en. The process is also transparent
through a detailed documentation supported by re"uisite
e!idence and clear mentioning of reasons for classification of a
borrower as willful defaulter. $t also gi!es ample opportunity
to the borrower to represent itself against the proposed action%
followed by a personal hearing% if re"uired. $n short% the
principles of natural justice are followed in the said para 3 of
the +aster #ircular.
The Reser!e 0an1 of $ndia has been continuously issuing
guidelines on JWillful 6efaulters3 in a phased manner
commencing from 2(th <ebruary 1&&& to discourage the
ban1s and financial institutions from granting any further
financial aid to the willful defaulters% so as to act as a deterrent
for the Jwillful defaulters3 and in order to safeguard ban1s from
the ris1s of loan repayments% interest and li"uidity. The
guidelines contained in the impugned +aster #ircular ha!e
been issued at the instance of the #entral Cigilance
#ommission and pursuant to the recommendations of the
Wor1ing 5roups. The instructions contained in the +aster
#ircular are aimed at curbing the menace of non8performing
assets in ban1s. The R0$% by issuing the said #ircular% has
ta1en few positi!e steps to protect the interests of ban1s and
Page 18 of 162
financial institutions and to ensure that a list of willful
defaulters is 1nown and made a!ailable to other ban1s and
financial institutions. The said purpose cannot be said to be
arbitrary and unjustified. The R0$3s circulars on Jwillful
defaulters3 are in consonance with the law of the land and are
meant for ensuring transparency and pro!iding accountability
so that the ban13s funds are not misused by the unscrupulous
elements.
S()*i++ion+ on )e,al# o# t,e Re+e-ve Ban1 o#
In/ia'
+r.-.7.-opar1ar% the learned senior ad!ocate assisted by
+r.*mar 0hatt% the learned ad!ocate appearing on behalf of
the Reser!e 0an1 of $ndia% made the following submissions ,
+r.-opar1ar% at the outset% submitted that so far as the
-tandard #hartered 0an1 is concerned% the same is a pri!ate
ban1. *lthough the same is a -cheduled 0an1 and figures in
-chedule8$$ to the Reser!e 0an1 of $ndia *ct% yet it cannot be
termed as an institution or a company carrying on any
statutory or public duty. Therefore% in such circumstances
although the petitioners of -pecial #i!il *pplication 7o.1(12(
of 2(1 may be entitled to challenge the constitutional !alidity
of the +aster #ircular issued by the Reser!e 0an1 of $ndia% yet
no writ could be issued by this #ourt under *rticle 224 of the
#onstitution in so far as the proposed action pursuant to the
issue of show-cause notice is concerned. $n support of his
submission% +r.-opar1ar has placed strong reliance on the
decision of the -upreme #ourt in the case of the <ederal 0an1
Ltd. !. -agar Thomas K others% 92((3:1( -# ;3;.
Page 19 of 162
+r.-opar1ar further submitted that the contention raised
on behalf of the petitioners as regards the absence of power
on the part of the Reser!e 0an1 of $ndia to issue the impugned
+aster #ircular is also de!oid of any merit. *ccording to
+r.-opar1ar% the Reser!e 0an1 of $ndia being one of the
watchdogs of finance and economy of the nation deri!es the
power from the pro!isions of -ections 21 and 3'8* of the
0an1ing Regulation *ct% 1&&.
$n response to our specific "uery as regards the control of
the R0$ upon the non8ban1ing financial institutions%
+r.-opar1ar drew our attention to #hapter8$$$0 of the Reser!e
0an1 of $ndia *ct% 1&3% i.e. the pro!isions relating to 7on8
0an1ing $nstitutions recei!ing deposits as <inancial $nstitutions.
+r.-opar1ar in!ited our attention to -ections '8A and '8$ of
the *ct% 1&3. -ection '8$9c: defines Efinancial institutionF
which means any non8ban1ing institution which carries on as
its business or part of its business any of the acti!ities
enumerated in clauses 9i: to 9f:.
+r.-opar1ar also in!ited our attention to -ection '8/*
which relates to the power of the ban1 to determine any policy
and issue directions.
+r.-opar1ar submitted that the Reser!e 0an1 of $ndia
being a monetary regulator frames the ban1ing policy. The
+aster #ircular impugned in the two petitions is a part of the
ban1ing policy. -uch ban1ing policy is specified by the Reser!e
0an1 of $ndia from time to time in the interest of the ban1ing
system or monetary stability or sound economic growth. While
Page 20 of 162
formulating any ban1ing policy% the Reser!e 0an1 of $ndia has
to gi!e due regard to the interest of the depositors and other
resources of the ban1.
+r.-opar1ar submits that the court sitting in a writ
jurisdiction under *rticle 224 of the #onstitution may not
eDamine the merits of the policy to find out% whether there
could ha!e been a better policy and interfere with such policy.
0an1ing policy re"uires economic and fiscal eDpertise.
*ccording to +r.-opar1ar% the eDperts who are "ualified to
address the issues are the best people to ta1e an appropriate
decision in the interest of the entire economy of the nation.
+r.-opar1ar laid much stress on the fact that the 7P*
accounts are a big threat to the economy of the nation. The
borrowers% at times% misuse the amount disbursed by the ban1
and thereby cause immense loss to a particular ban1. )n
matters affecting policy and those re"uiring eDpertise% the
court should be slow and circumspect to interfere unless such
policy is contrary to the statutory pro!isions% arbitrary or
otherwise unconstitutional.
+r.-opar1ar submitted that the issue of the +aster
#ircular by the Reser!e 0an1 of $ndia relating to Ewillful
defaultF and Ewillful defaultersF does not tra!el beyond the
scope of the delegated legislation. Aa!ing regard to the nature
of duties% functions and the role which the Reser!e 0an1 of
$ndia plays as a premier financial institution of the country it
was within the scope and powers of the R0$ to issue such a
circular in the interest of the ban1ing system and the economy
of the country.
Page 21 of 162
+r.-opar1ar submitted that a mere possibility of an
abuse of any pro!ision of law% rule% regulation or a circular li1e
the one in the present case% by itself% would not be sufficient to
condemn the same as ultra vires the pro!isions of the
#onstitution of $ndia or other ban1ing enactments.
+r.-opar1ar submitted that the contention of bias and
the ban1 being a judge in its own cause% is also de!oid of any
merit. +r.-opar1ar submits that the maDim Enemo judex in
causa suaF constitute the basic elements of a fair hearing and
is sought to be applied mechanically without any basis for such
an apprehension.
*ccording to +r.-opar1ar% the policy decision of the
Reser!e 0an1 of $ndia to issue such a circular cannot be
condemned on mere application of the doctrine referred to
abo!e. $n a gi!en case% if the action pursuant to such a policy
decision is found to be tainted with bias% then in such
circumstances% the #ourt can always correct such an arbitrary
action. Aowe!er% that by itself would not render the policy
decision bad in law.
+r.-opar1ar in support of his submission has placed
strong reliance on a decision of the -upreme #ourt in the case
of Inion of $ndia !. 0ipin1umar /ain% 2(('9&: -## ';&% and in
the case of 6elhi <inancial #orporation and another !. Raji!
*nand and others% 92((: 11 -## 42'.
+r.-opar1ar submitted that the contention as regards the
unreasonable restriction imposed on a promoter>director of a
Page 22 of 162
company being in direct infringement of the *rticle 1&91:9g: of
the #onstitution of $ndia is absolutely de!oid of any merit.
*ccording to +r.-opar1ar% although the right to do business is
a fundamental right guaranteed under *rticle 1&91:9g: of the
#onstitution% yet this right is subject to a reasonable restriction
under *rticle 1&94: of the #onstitution. The reasonableness of
the restriction has to be determined in an objecti!e manner
and has to be seen from the point of !iew of interest of the
general public and not merely from the point of !iew of person
upon whom the restrictions are imposed.
+r.-opar1ar% therefore% submits that there being no merit
in both the writ8applications% the same deser!es to be
rejected.
ANAL2SIS '
Aa!ing heard the learned counsel appearing for the
parties and ha!ing gone through the materials on record% the
only "uestion that falls for our consideration in these petitions
is% whether the petitioners are entitled to any of the reliefs as
prayed for in their petitions.
$t is a settled position of law that a statute can be
in!alidated or held unconstitutional 88
9i: if it is ultra !ires the Patent *ctH
9ii: if it is contrary to the statutory pro!isions other
than those contained in the Parent *ctH
9iii: if law ma1ing power has been eDercised in bad
Page 23 of 162
faithH
9i!: if it is not reasonable and it goes against the
legislati!e policyH and
9!: if it does not fulfill the object and purpose of the
enabling *ct.
$t is also well8settled that while eDamining the
constitutionality of a statute it must be assumed that the
legislature understands and appreciates the needs of the
people and the laws it enacts are directed to problems which
are made manifest by eDperience and that the elected
representati!es assembled in a legislature enact laws which
they consider to be reasonable for the purpose for which they
are enacted. There is a presumption in fa!our of
constitutionality and a law will not be declared unconstitutional
unless the case is so clear as to be free from doubt. * statute
should not be declared unconstitutional merely because in the
opinion of the #ourt it !iolates one or more of the principles of
liberty% of the spirit of the #onstitution% unless such principles
and that spirit are found in the terms of the #onstitution.
3EW SALIENT 3EATURES O3 THE MASTER CIRCULAR
'
-ince the issue re!ol!es around the legality and !alidity
of the +aster #ircular issued by the Reser!e 0an1 of $ndia% we
deem it necessary to loo1 into the same in little details.
Page 24 of 162
The need and necessity to issue the #ircular has been
eDplained in the +aster #ircular% which reads as under ,
ursuant to the instructions of the !entral "igilance
!ommission for collection of information on willful
defaults of #s.$% lakhs and above by #&I and
dissemination to the reporting banks and FIs' a scheme
was framed by #&I with effect from (st )pril (*** under
which the banks and notified )ll India Financial
Institutions were re+uired to submit to #&I the details of
the willful defaulters. ,illful default broadly covered the
following-
a. /eliberate non-payment of the dues despite
ade+uate cash flow and good networth0
b. 1iphoning off of funds to the detriment of the
defaulting unit0
c. )ssets financed either not been purchased or
been sold and proceeds have been misutilised0
d. 2isrepresentation3falsification of records0
e. /isposal3removal of securities without bank4s
knowledge0
f. Fraudulent transactions by the borrower.
)ccordingly' banks and FIs started reporting all cases of
willful defaults' which occurred or were detected after
5(st 2arch (*** on a +uarterly basis. It covered all non-
performing borrowal accounts with outstandings 6funded
facilities and such non-funded facilities which are
converted into funded facilities. aggregating #s.$% lakhs
and above identified as willful default by a !ommittee of
higher functionaries headed by the 7xecutive /irector
and consisting of two 82s3/82s. &anks3FIs were advised
that they should examine all cases of willful defaults of
#s (.99 crore and above for filing of suits and also
consider criminal action wherever instances of
cheating3fraud by the defaulting borrowers were
detected. In case of consortium3multiple lending' banks
and FIs were advised that they report willful defaults to
Page 25 of 162
other participating3financing banks also. !ases of willful
defaults at overseas branches were re+uired be reported
if such disclosure is permitted under the laws of the host
country.
The term Ewillful defaultF as contained in clause 92.1: has
been redefined in supersession of the earlier definition as
under ,
$.( /efinition of wilful default
:he term ;wilful default; has been redefined in supersession of
the earlier definition as under-
) ;wilful default; would be deemed to have occurred if any of
the following events is noted --
6a. :he unit has defaulted in meeting its payment3
repayment obligations to the lender even when it has the
capacity to honour the said obligations.
6b. :he unit has defaulted in meeting its payment3
repayment obligations to the lender and has not utilised
the finance from the lender for the specific purposes for
which finance was availed of but has diverted the funds
for other purposes.
6c. :he unit has defaulted in meeting its payment3
repayment obligations to the lender and has siphoned off
the funds so that the funds have not been utilised for the
specific purpose for which finance was availed of' nor are
the funds available with the unit in the form of other
assets.
6d. :he unit has defaulted in meeting its payment3
repayment obligations to the lender and has also
disposed off or removed the movable fixed assets or
immovable property given by him or it for the purpose of
securing a term loan without the knowledge of the
bank3lender.
The terms Edi!ersion of fundsF and Esiphoning of fundsF
ha!e also been defined in the impugned +aster #ircular. They
Page 26 of 162
read as under ,
$.$ /iversion and siphoning of funds
:he terms diversion of funds and siphoning of funds
should construe to mean the following--
$.$.( /iversion of funds' referred to at para $.(6b. above'
would be construed to include any one of the undernoted
occurrences-
6a. utilisation of short-term working capital funds for
long-term purposes not in conformity with the terms
of sanction0
6b. deploying borrowed funds for purposes3activities
or creation of assets other than those for which the
loan was sanctioned0
6c. transferring funds to the subsidiaries38roup
companies or other corporates by whatever
modalities0
6d. routing of funds through any bank other than
the lender bank or members of consortium without
prior permission of the lender0
6e. investment in other companies by way of
ac+uiring e+uities3 debt instruments without
approval of lenders0
6f. shortfall in deployment of funds vis-a-vis the
amounts disbursed3drawn and the difference not
being accounted for.
$.$.$ 1iphoning of funds' referred to at para $.(6c. above'
should be construed to occur if any funds borrowed from
banks3FIs are utilised for purposes un-related to the
operations of the borrower' to the detriment of the
financial health of the entity or of the lender. :he
decision as to whether a particular instance amounts to
siphoning of funds would have to be a judgement of the
lenders based on objective facts and circumstances of
the case.
:he identification of the willful default should be made
keeping in view the track record of the borrowers and
Page 27 of 162
should not be decided on the basis of isolated
transactions3incidents. :he default to be categorised as
willful must be intentional' deliberate and calculated.
The #ircular eDplains the term Ecut8off limitsF for use of
funds and stipulates the Epenal measuresF which are re"uired
to be ta1en to pre!ent the access to the capital mar1ets by the
willful defaulters. The +aster #ircular enumerates the Epenal
measuresF which can be initiated by a ban1 against the willful
defaulters. The said Epenal measuresF read as under ,
:he following measures should be initiated by the banks
and FIs against the willful defaulters identified as per the
definition indicated at paragraph $.( above-
a. <o additional facilities should be granted by any
bank3FI to the listed willful defaulters. In addition'
the entrepreneurs3promoters of companies where
banks3FIs have identified siphoning3diversion of
funds' misrepresentation' falsification of accounts
and fraudulent transactions should be debarred
from institutional finance from the scheduled
commercial banks' /evelopment Financial
Institutions' 8overnment owned <&F!s' investment
institutions etc. for floating new ventures for a
period of % years from the date the name of the
willful defaulter is published in the list of willful
defaulters by the #&I.
b. :he legal process' wherever warranted' against
the borrowers3 guarantors and foreclosure of
recovery of dues should be initiated expeditiously.
:he lenders may initiate criminal proceedings
against willful defaulters' wherever necessary.
c. ,herever possible' the banks and FIs should
adopt a proactive approach for a change of
management of the willfully defaulting borrower
unit.
d. ) covenant in the loan agreements' with the
Page 28 of 162
companies in which the banks3notified FIs have
significant stake' should be incorporated by the
banks3FIs to the effect that the borrowing company
should not induct a person who is a promoter or
director on the &oard of a company which has been
identified as a willful defaulter as per the definition
at paragraph $.( above and that in case' such a
person is found to be on the &oard of the borrower
company' it would take expeditious and effective
steps for removal of the person from its &oard.
$mmediately after mentioning the penal measures in the
+aster #ircular% it has been stated that it would be imperati!e
on the part of the ban1s and financial institutions to put in
place a transparent mechanism for the entire process so that
the penal measures are not misused and the scope of such
discretionary orders are 1ept to the barest minimum.
To ensure that the identification of a willful defaulter is
transparent and objecti!e so as not to cause any
incon!enience to the borrowers% the +aster #ircular% in clause
93:% has set out 5rie!ances Redressal +echanism. The said
clause reads as under ,
5. 8rievances #edressal 2echanism
&anks3FIs should take the following measures in
identifying and reporting instances of willful default-
6i. ,ith a view to imparting more objectivity in identifying
cases of willful default' decisions to classify the borrower
as willful defaulter should be entrusted to a !ommittee of
higher functionaries headed by the 7xecutive /irector
and consisting of two 82s3/82s as decided by the &oard
of the concerned bank3FI.
6ii. :he decision taken on classification of willful
defaulters should be well documented and supported by
re+uisite evidence. :he decision should clearly spell out
Page 29 of 162
the reasons for which the borrower has been declared as
willful defaulter vis-=-vis #&I guidelines.
6iii. :he borrower should thereafter be suitably advised
about the proposal to classify him as willful defaulter
along with the reasons therefor. :he concerned borrower
should be provided reasonable time 6say (% days. for
making representation against such decision' if he so
desires' to a 8rievance #edressal !ommittee headed by
the !hairman and 2anaging /irector and consisting of
two other senior officials.
6iv. Further' the above 8rievance #edressal !ommittee
should also give a hearing to the borrower if he
represents that he has been wrongly classified as willful
defaulter.
6v. ) final declaration as >willful defaulter? should be
made after a view is taken by the !ommittee on the
representation and the borrower should be suitably
advised.
* bare perusal of the aforesaid clause indicates that the
safeguards ha!e been pro!ided to protect the borrowers by
ensuring that the decision to classify a borrower as a willful
defaulter is entrusted to a committee% which is headed by the
@Decuti!e 6irector of the concerned ban1s>financial
institutions. 0efore a borrower is classified as a willful
defaulter% he is re"uired to be issued a notice along with
documents and other e!idence. The borrower is to be pro!ided
with a reasonable time to ma1e representation against such
proposed action. Thereafter% a decision has to be ta1en%
whether a borrower is to be declared as a willful defaulter and
the borrower is to be informed. Thus% there are number of
stipulation and safeguards in the impugned +aster #ircular to
protect the interest of the borrowers.
Page 30 of 162
The object and purpose behind issuing the +aster
#ircular appears to be plain and simple. The +aster #ircular
has been issued to ta1e care of the defects and problems
eDperienced in the past. $t is a policy decision which seems to
ha!e been ta1en after thorough eDamination of the problems
faced by the ban1s and the financial institutions. The
foundation of a scheme has been eDplained in the +aster
#ircular% which reads as under ,
$. 8uidelines issued on wilful defaulters
Further' considering the concerns expressed over the
persistence of willful default in the financial system in the
@th #eport of the arliament4s 1tanding !ommittee on
Finance on Financial Institutions' the #eserve &ank of
India' in consultation with the 8overnment of India'
constituted in 2ay $99( a ,orking 8roup on ,illful
/efaulters 6,8,/. under the !hairmanship of 1hri
1.1.Aohli' the then !hairman of the Indian &anks4
)ssociation' for examining some of the recommendations
of the !ommittee. :he 8roup submitted its report in
<ovember $99(. :he recommendations of the ,8,/
were further examined by an In Bouse ,orking 8roup
constituted by the #eserve &ank. )ccordingly' the
1cheme was further revised by #&I on 2ay 59' $99$.
:he above scheme was in addition to the 1cheme of
/isclosure of Information on /efaulting &orrowers of
banks and FIs introduced in )pril (**C' vide #&I !ircular
/&D/.<o.&!3!I13CE3$9.(F.99$3*C dated $5 )pril (**C.
POWER O3 THE RESER4E BANK O3 INDIA '
We now proceed to deal with the first contention raised
on behalf of the petitioners as regards the power of the
Page 31 of 162
Reser!e 0an1 of $ndia to issue the +aster #ircular. *ccording
to the learned ad!ocates appearing on behalf of the petitioners
the instructions contained in the +aster #ircular are beyond
the legislati!e competence of the Reser!e 0an1 of $ndia. The
#ircular does not refer to any pro!ision of law under which it
has been issued.
We are not impressed by such submission can!assed on
behalf of the petitioners. The statutory scheme of the 0an1ing
Regulation *ct% 1&&% and the Reser!e 0an1 of $ndia *ct% 1&3%
was enacted by the Parliament for the regulation of ban1ing
business which% unli1e any other business% is a special 1ind of
business. 0an1ing business is the business of acceptance of
withdrawable deposits of money from the public for the
purpose of lending of in!estment. While that describes the
ordinary nature of ban1ing% that acti!ity in a de!eloping
society and economy has ac"uired an e!olutionary nature% in
that the essence of ban1ing business in such an economy
in!ol!es ban1s operating as basic financial intermediaries and
playing a 1ey role in the country2s economy in general and
mobilisation and distribution of the country2s sa!ings in
particular. 0an1s are the largest repositories of the nation2s
sa!ings. The conduct and affairs of the ban1s influence the
!arious sectors of the economy. The economic de!elopment of
the country depends largely on the safety and soundness of
ban1ing institutions. 0an1s are also the principal means for
transmitting the credit policies of the country. Aa!ing regard to
the delicate position of a ban1 in the country2s economy% the
failure of one ban1 can ha!e a disastrous effect on the whole
ban1ing system% ha!ing the potential of leading to systematic
Page 32 of 162
crisis with prejudicial effect on the economy as a whole. $n
!iew of all these considerations% the ban1ing sector has been a
highly regulated area all o!er the world. These principles
go!erning the ban1ing business ha!e been embodied in the
ban1ing laws of $ndia% !i?. the Reser!e 0an1 of $ndia *ct% 1&3%
and the 0an1ing Regulation *ct% 1&&.
The significance of the Reser!e 0an12s position as the
central ban1 of the country needs no emphasis. *s the central
ban1 and as the primary regulator of the ban1ing business% the
Reser!e 0an1 has been !ested with !ery wide powers and is
also charged with certain duties as reflected in the preambles
to and the pro!isions of the two legislations referred to abo!e.
The preamble to the Reser!e 0an1 of $ndia *ct states that the
ban1 is established% inter alia% generally to operate the
currency and credit system of the country to its ad!antage.
The powers under the Reser!e 0an1 of $ndia *ct as also under
the 0an1ing Regulation *ct ha!e been conferred on the ban1
with a !iew to fulfill these objecti!es. The !arious powers under
the 0an1ing Regulation *ct are related to public interest or the
interest of ban1ing policy. The eDpression Lban1ing policyL has
been defined in clause 9ca: of section ' of the 0an1ing
Regulation *ct as under ,
;6ca. 4banking policy4 means any policy which is specified
from time to time by the #eserve &ank in the interest of
monetary stability or sound economic growth' having due
regard to the interests of the depositors' the volume of
deposits and other resources of the bank and the need
for e+uitable allocation and the efficient use of these
deposits and resources.;
Page 33 of 162
This definition and power conferred thereunder on the
Reser!e 0an1 to specify the policy clearly reflect the object
that the ban1s truly become the instruments of transmitting
economic policies including the credit policies of the country in
a manner eDpected of them and ser!e the cause of public
interest. $t is the Reser!e 0an12s function to ensure% as best as
it can% that the said object is achie!ed. <urther% in !iew of the
ad!erse effect that a ban12s failure may ha!e on the economy%
the statutes also aim that the Reser!e 0an12s powers are
eDercised not only to effecti!ely handle the crisis in the affairs
of a ban1ing company% but also to pre!ent a percei!ed failure
or crisis in the affairs of the ban1ing company. $n respect of
such matters% Parliament has !ested full discretion in the
Reser!e 0an1 and the #entral 5o!ernment so that it should be
open for these authorities to decide% depending upon the
contingencies% the !arious alternati!es or combination of them
as pro!ided by law to ensure protection of the interest of the
depositors% the public interest and the interest of ban1ing
policy.
21. Power of Reserve Bank to control advances by
banking companies.G
6(. ,here the #eserve &ank is satisfied that it is
necessary or expedient in the public interest or in the
interests of depositors or banking policy so to do' it may
determine the policy in relation to advances to be
followed by banking companies generally or by any
banking company in particular' and when the policy has
been so determined' all banking companies or the
banking company concerned' as the case may be' shall
be bound to follow the policy as so determined.
6$. ,ithout prejudice to the generality of the power
vested in the #eserve &ank under sub-section 6(. the
Page 34 of 162
#eserve &ank may give directions to banking companies'
either generally or to any banking company or group of
banking companies in particular' as to G
6a. the purposes for which advances may or may
not be made'
6b. the margins to be maintained in respect of
secured advances'
6c. the maximum amount of advances or other
financial accommodation which' having regard to
the paid-up capital' reserves and deposits of a
banking company and other relevant
considerations' may be made by that banking
company to any one company' firm' association of
persons or individual'
6d. the maximum amount up to which' having
regard to the considerations referred to in clause
6c.' guarantees may be given by a banking
company on behalf of any one company' firm'
association of persons or individual' and
6e. the rate of interest and other terms and
conditions on which advances or other financial
accommodation may be made or guarantees may
be given.
65. 7very banking company shall be bound to comply
with any directions given to it under this section.
35A Power of t!e Reserve Bank to give
directions
6(. ,here the #eserve &ank is satisfied that-
6a. in the Hpublic interestI0 or
H6aa. in the interest of banking policy0 orI
6b. to prevent the affairs of any banking company
being conducted in a manner detrimental to the
interests of the depositors or in a manner
prejudicial to the interests of the banking !ompany0
or
Page 35 of 162
6c. to secure the proper management of any
banking company generally0
it is necessary to issue directions to banking companies
generally or to any banking company in particular' it may
from time to time' issue such directions as it deems fit'
and the banking companies or the banking company' as
the case may be' shall be bound to comply with such
directions.
6$. :he #eserve &ank may on representation made to it
or on its own motion' modify or cancel any direction
issued under sub-section 6(.' and in so modifying or
canceling any direction may impose such conditions as it
thinks fit' subject to which the modification or
cancellation shall have effect.I
$t is beyond dispute that ban1s% as financial
instrumentalities are re"uired to stri!e to fulfill% not only the
object of achie!ing commercial efficiency% but also to ser!e the
object of public interest. $n fact% without ser!ing public interest%
no ban1 can legitimately claim any right to eDist. $t is
inconcei!able that a ban1% as an instrumentality of% and also
being capable of% wielding powerful weapons for
transformation of the socioeconomic structure of the society%
can act without ta1ing into account the public interest and can
act for furtherance of pri!ate interests of a limited group of
persons.

$t also needs to be appreciated that with the liberalisation
in the economy% the ban1ing sector is widely eDpanding
necessitating basic changes in the profiles of the ban1s in
relation to the pattern of their shareholding% capital structure%
management composition% as also operational systems% and
Page 36 of 162
e!en the !ery manner of conduct of ban1ing business. The
past failures of some pri!ate sector ban1s and huge losses of
public sector ban1s ha!e only underlined the need for such
changes. Ta1ing note of this% and the changing economic
scenario as also the emerging competiti!e en!ironment% it has
become imperati!e for the ban1s to become more
professionally managed% widely capital based% to ha!e more
di!ersified acti!ities% to be more technically ad!anced. This% in
turn% has also resulted% in a policy by the Reser!e 0an1 for
consolidation of the ban1ing system and other measures in the
interest of the ban1ing system of the country as a whole.
<urther% the past failures of some ban1s raising concern for the
ban1ing system ha!e constrained the Reser!e 0an1 to ta1e
many steps to strengthen the financial soundness of the
ban1ing system. $ncreasing the capital base of the ban1s is one
such measure. -imilarly% !arious other policy measures ha!e
been initiated to ensure better "uality of assets% induction of
professional management% di!ersified credit portfolio%
impro!ed accounting systems% transparency in balance8sheets%
etc.
The "uestion for our consideration is% whether it will be
open for this court to re!iew the decisions which ha!e been
ta1en by a specialised body li1e the Reser!e 0an1 of $ndia and
arri!e at different conclusions. The scope of jurisdiction in such
matters has been settled by !arious judgments of the -upreme
#ourt and the same may be referred to at this stage.
$n /oseph Guru!illa Cellu1unnel !. Reser!e 0an1 of $ndia%
*$R 1&42 -# 13;1% the position of the Reser!e 0an1 of $ndia is
Page 37 of 162
clearly stated in the following paragraphs which are referred to
at pp.13;&8=( and 13=2 as under ,
;&ut the most important function of the #eserve &ank is
to regulate the banking system generally. :he #eserve
&ank has been described as a bankers4 bank. Jnder the
#eserve &ank of India )ct' the scheduled banks maintain
certain balances and the #eserve &ank can lend
assistance to those banks 4as a lender of the last resort4.
:he #eserve &ank has also been given certain advisory
and regulatory functions. &y its position as a central
bank' it acts as an agency for collecting financial
information and statistics. It advises 8overnment and
other banks on financial and banking matters' and for
this purpose' it keeps itself informed of the activities and
monetary position of scheduled and other banks and
inspects the books and accounts of scheduled banks and
advises 8overnment after inspection whether a particular
bank should be included in the 1econd 1chedule or not.
7very scheduled bank is re+uired to send to the #eserve
&ank and to the !entral 8overnment a weekly return of
its position in a form' which is prescribed. 1ometimes'
however' the #eserve &ank allows a particular bank to
send its returns once a month instead of every week.
From these returns' the #eserve &ank prepares and
publishes consolidated statements showing the monetary
position in the country. :he inclusion of a bank in the
1econd 1chedule is the function of the #eserve &ank' and
under sections C$6F.6a.6iii. and 6b.6ii. it satisfies itself'
inter alia' that the affairs of the particular bank are not
being conducted in a manner detrimental to the interests
of its depositors. :he #eserve &ank has further the power
to prohibit any scheduled bank from receiving' after a
week' any fresh deposits.
:he above analysis of some of the provisions of the
#eserve &ank of India )ct show that the #eserve &ank of
India has been created as a central bank with powers of
supervision' advice and inspection' over banks'
particularly those desiring that they be included in the
1econd 1chedule or those scheduled already. :he
#eserve &ank thus safeguards the economy and the
financial stability of the country. <o doubt' the board is
Page 38 of 162
composed of nominated members0 but from the nature of
things' it could not be otherwise. <either election nor
competitive examinations can effectively take the place
of nominations' if the board is to be composed of men of
proven worth and standing' and there is no other method
which can even be contemplated. <o doubt' the
members of the board are subject to removal' but neither
integrity nor efficiency is secured only by such
guarantee' and we have no reason to think that the
#eserve &ank acted in this case' or acts in other cases
under pressure or from obli+ue motives. )s was pointed
out in another connection by this court in )ll India &ank
7mployees )ssociation v. <ational Industrial :ribunal' )I#
(*F$ 1! (E( at p.(@5 -
If it was not the #eserve &ank of India' the only
other authority that could be entrusted with the
function would be the Finance 2inistry of the
8overnment of India and that department would
necessarily be guided by the #eserve &ank having
regard to the intimate knowledge which the
#eserve &ank has of the banking structure of the
country as a whole and of the affairs of each bank
in particular.
..... ...... ..... .....
<or do the powers of the #eserve &ank end there. :he
#eserve bank not only has powers over banking
companies while they are functioning' but it has also
powers when the banking companies wish or are forced
to cease to function. If a banking company wants to
suspend its business and applies to the Bigh !ourt for a
moratorium' the application is not maintainable' unless it
is accompanied by a report of the #eserve &ank
indicating that in the opinion of the #eserve &ank the
banking company will be able to pay its debts. ,hen the
Bigh !ourt grants the reliefs without such report' it has to
call for a report from the #eserve &ank. :he Bigh !ourt is
also re+uired to have regard to the interests of the
depositors' and even during the period of moratorium
granted by the Bigh !ourt' the #eserve &ank can apply
for the winding up of the banking company. 1ections 5*
and C() give special powers to the #eserve &ank in
winding up proceedings. 7ven in voluntary winding up of
Page 39 of 162
a banking company' the #eserve &ank has to certify that
the banking company is able to pay in full all its debts to
its creditors' as they accrue. In amalgamation of banking
companies' the scheme has to be approved by the
#eserve &ank. 1imilarly' in compromises or
arrangements between the banking company and its
creditors' the #eserve &ank has to be satisfied. In all
these matters' the satisfaction' inter alia' must be as to
the interests of the depositors. In reconstruction of
banking company after an application by the #eserve
&ank for an order of moratorium' the #eserve &ank has
to satisfy itself and prepare a scheme' which inter alia
must be in the interests of the depositors.;
The feasibility and practicability of granting hearing%
recording of reasons and communicating the same to the
parties has been eDplained at pp.13=3 and 13=;8== as under ,
;:hat leaves over the second and third arguments' which
proceed upon the same materials. In this connection' the
main grounds of attack have already been set out in this
judgment. &efore we deal with the central point' we shall
deal with certain others which proceed said so to speak'
from the side lines. :he objection that the #eserve &ank
gives no hearing' records no reasons in writing and does
not communicate them is met at least in this case by the
admitted facts. :he numerous inspection reports and
directions issued by the #eserve &ank over a period of
nearly nine years' together with the application filed in
this case' prove amply that there was enough hearing of
and enough communication of the grounds of action to
the alai &ank. :he &ank had also sufficient time and
opportunity to establish its own point of view before the
#eserve &ank. It was impossible that the #eserve &ank'
with the run on the bank' would sit down to decide after
hearing whether to take action or not' while withdrawals
were being at the rate of #s. E lakhs per day. :he
emergency of the situations which may arise' is itself the
justification for the procedure open under the )ct and
taken in this case. In our opinion' these grounds cannot
be entertained. It is difficult to imagine that the #eserve
&ank would act differently in another case.
Page 40 of 162
..... ..... ..... .....
:he learned )ttorney 8eneral' on the other side' drew
our attention to "irendra v. 1tate of unjab' ' where it has
been pointed out that in judging the reasonableness of
any particular law 4the surrounding circumstances in
which the impugned law came to be enacted' the
underlying purpose of the enactment and the extent and
urgency of the evil sought to be remedied4 must also be
considered. :hat case concerned the freedom of speech
and its alleged curtailment by the unjab 1pecial owers
6ress. )ct' (*%F. In judging the reasonableness of the
law from the angle of the exclusion of courts' this court
observed -
Kegislature had to ask itself the +uestion - who will
be the appropriate authority to determine at any
given point of time as to whether the prevailing
circumstances re+uire some restriction to be placed
on the right to freedom of speech and expression
and the right to carry on any occupation' trade or
business and to what extent L :he answer was
obvious' namely' that as the 1tate 8overnment was
charged with the preservation of law and order in
the 1tate' as it alone was in possession of all
material facts it would be the best authority to
investigate the circumstances and assess the
urgency of the situation that might arise and to
make up its mind whether any and' if so' what
anticipatory action must be taken for the prevention
of the threatened or anticipated breach of the
peace. :he court is wholly unsuited to gauge the
seriousness of the situation' for it cannot be in
possession of materials which are available only to
the executive 8overnment. :herefore' the
determination of the time when and the extent to
which restrictions should be imposed on the ress
must of necessity be left to the judgment and
discretion of the 1tate 8overnment and that is
exactly what the Kegislature did by passing the
statute... Muick decision and swift and effective
action must be of the essence of these powers and
the exercise of it must' therefore' be left to the
subjective satisfaction of the 8overnment... :o
Page 41 of 162
make the exercise of these powers justiciable and
subject to the judicial scrutiny will defeat the very
purpose of the enactment.
These obser!ations lay down clearly that there may be
occasions and situations in which the Legislature may% with
reason% thin1 that the determination of an issue may be left to
an eDpert eDecuti!e li1e the Reser!e 0an1 rather than the
courts without incurring the penalty of ha!ing the law declared
!oid.
The scope of powers of the Reser!e 0an1 of $ndia is
further amplified in the judgment reported as Peerless 5eneral
<inance and $n!estment #o. Ltd. !. Reser!e 0an1 of $ndia% *$R
1&&2 -# 1(33. Paragraphs 3(% 31 and '2 may be reproduced
as under ,
;59. &efore examining the scope and effect of the
impugned paragraphs 6F. and 6($. of the /irections of
(*@E' it is also important to note that the #eserve &ank
of India which is bankers4 bank is a creature of statute. It
has a large contingent of expert advisers relating to
matters affecting the economy of the entire country and
nobody can doubt the bona fides of the #eserve &ank in
issuing the impugned directions of (*@E. :he #eserve
&ank plays an important role in the economy and
financial affairs of India and one of its important functions
is to regulate the banking system in the country. It is the
duty of the #eserve &ank to safeguard the economy and
financial stability of the country. ,hile examining the
power conferred by section %@) of the !ompanies )ct'
(*%F' on the !entral 8overnment to prescribe the limits
up to which' the manner in which and the conditions
subject to which deposits may be invited or accepted by
non-banking companies' this court in /elhi !loth and
8eneral 2ills !o. Ktd. v. Jnion of India' )I# (*@5 1! *5E'
observed as under -
Page 42 of 162
2ischief was known and the regulatory measure
was introduced to remedy the mischief. :he
conditions which can be prescribed to effectuate
this purpose must' a fortiori' to be valid' fairly and
reasonably' relate to checkmate the abuse of
juggling with the depositors3investors hard earned
money by the corporate sector and to confer upon
them a measure of protection namely availability of
li+uid assets to meet the obligation of repayment of
deposit which is implicit in acceptance of deposit.
!an it be said that the conditions prescribed by the
/eposit #ules are so irrelevant or have no
reasonable nexus to the objects sought to be
achieved as to be arbitrary L :he answer is
emphatically in the negative. 7ven at the cost of
repetition' it can be stated with confidence that the
rules which prescribed conditions subject to which
deposits can be invited and accepted do operate to
extend a measure of protection against the
notorious abuses of economic power by the
corporate sector' to the detriment of
depositors3investors' a segment of the society
which can be appropriately described as weaker in
relation to the mighty corporation. Dne need not go
so far with #alph <ader in )merica incorporated to
establish that political institutions may fail to arrest
or control this ever-widening power of corporations.
)nd can one wish away the degree of sickness in
private sector companies L :o the extent companies
develop sickness' in direct proportion the
controllers of such companies become healthy. In a
welfare 1tate' it is the constitutional obligation of
the 1tate to protect socially and economically
weaker segments of the society against the
exploitation by corporations. ,e' therefore' see no
merit in the submission' that the conditions
prescribed bear no relevance to the object or the
purpose for which the power was conferred under
section %@) on the !entral 8overnment.
5(. :he function of the court is to see that lawful
authority is not abused but not to appropriate to itself the
task entrusted to that authority. It is well settled that a
public body invested with statutory powers must take
Page 43 of 162
care not to exceed or abuse its power. It must keep
within the limits of the authority committed to it. It must
act in good faith and it must act reasonably. !ourts are
not to interfere with economic policy which is the
function of experts. It is not the function of the courts to
sit in judgment over matters of economic policy and it
must necessarily be left to the expert bodies. In such
matters even experts can seriously and doubtlessly
differ. !ourts cannot be expected to decide them without
even the aid of experts.
%$. :his court in Noseph Auruvilla "ellukunnel v. #eserve
&ank of India' )I# (*F$ 1! (5E( held that the #&I is 4a
bankers4 bank and 4lender of the last resort4. Its objective
is to ensure monetary stability in India and to operate
and regulate the credit system of the country. It has'
therefore' to perform a delicate balance between the
need to preserve and maintain the credit structure of the
country by strengthening the rule as well as apparent
credit structure of the banks operating in the country and
the interest of depositors. In an underdeveloped country
like ours' where majority of the population are illiterate
and poor and are not conversant with banking operations
and in underdeveloped money and capital market with
mixed economy' the !onstitution charges the 1tate to
prevent exploitation and so the #&I would play both
promotional and regulatory roles. :hus the #&I occupies
a place of 4pre-eminence4 to ensure monetary discipline
and to regulate the economy or the credit system of the
country as an expert body. It also advises the
8overnment in public finance and monetary regulations.
:he banks or non-banking institutions shall have to
regulate their operations in accordance not only with the
provisions of the )ct but also the rules and directions or
instructions issued by the #&I in exercise of the power
thereunder. !hapter 5-& expressly deals with regulations
of deposit and finance received by the #<&!s. :he
directions' therefore' are statutory regulations.;
Thus% from the abo!e% the law is well8settled that the
Reser!e 0an1 of $ndia% which is described as the supreme ban1
of the country% is empowered to regulate the ban1ing system
and certain regulatory functions ha!e been assigned to it by
Page 44 of 162
the pro!isions of the Reser!e 0an1 of $ndia *ct% 1&3 and the
0an1ing Regulation *ct% 1&&. $t is in eDercise of such powers
that the Reser!e 0an1 of $ndia has thought fit to issue the
impugned +aster #ircular.
We are also not impressed by the submission can!assed
on behalf of the petitioners that the source of power has not
been indicated in the +aster #ircular and there is no reference
of any public interest in the impugned #ircular. $n short% the
submission on behalf of the petitioners is that% if the +aster
#ircular has been issued by the Reser!e 0an1 of $ndia in public
interest% then it should ha!e been stated in so many words
along with the statutory pro!isions under which the Reser!e
0an1 of $ndia deri!es the power.
$t is well8settled that if source of power is traceable%
eDercise of such power cannot be set-aside merely because
the same has not been disclosed. $n this conteDt% we may
profitably refer to a decision of the -upreme #ourt in the case
of Inion of $ndia !. *?adi 0achao *ndolan% 92((:1( -## 1.
The issue before the -upreme #ourt was% whether the
impugned circular issued under the $ncome TaD *ct was ultra
vires -ection 11& of the *ct. The -upreme #ourt in para 4
obser!ed thus% which% in our opinion% answers the contention
can!assed on behalf of the petitioners ,
CF. ,hile commenting adversely upon the validity of the
impugned circular' the Bigh !ourt says ;that the circular
itself does not show that the same has been issued under
1ection ((* of the Income-tax )ct. Dnly in a case where
the circular is issued under 1ection ((* of the Income-tax
)ct' the same would be legally binding on the revenue.
Page 45 of 162
:he circular does not deal with the power of the I:D to
consider the +uestion as to whether although apparently
a company is incorporated in 2auritius but whether the
company is also a resident of India and3or not a resident
of 2auritius at all.
$t is trite law that as long as an authority has power%
which is traceable to a source% the mere fact that source of
power is not indicated in an instrument does not render the
instrument in!alid.
*lthough the learned ad!ocates appearing on behalf of
the petitioners ha!e placed strong reliance on a decision of the
Garnata1a Aigh #ourt in the case of @.-athyanarayanan
9supra:% yet with due deference we are unable to subscribe to
the !iews eDpressed by Ais Lordship% more particularly% when
there are -upreme #ourt decisions on the issue.
DELE5ATED LE5ISLATION '
The abo!e ta1es us to deal with the submission as
regards the scope and power of the Reser!e 0an1 of $ndia to
issue the +aster #ircular in eDercise of powers under the
delegated legislation.
$t is true that a delegated legislation can be challenged
before the #ourts on the ground of being ultra vires the parent
*ct. The #ourts can adjudge the legality and !alidity of
delegated legislation by applying the doctrine of ultra vires.
The doctrine of ultra vires has two aspects , substanti!e and
Page 46 of 162
procedural. When delegated legislation goes beyond the scope
of the authority conferred by% or it is in conflict with% the parent
statute it is in!alid and this is 1nown as substanti!e ultra vires.
When the regulation8ma1ing authority de!iates from the
procedure% if any% prescribed by the parent statute for ma1ing
regulations% it is 1nown as procedural ultra vires. $n these writ
petitions% what is urged is the substanti!e ultra vires only and
not procedural ultra vires. Whene!er any person or body of
persons% eDercising statutory authority acts beyond the powers
conferred upon him or them by statute% such acts become
ultra vires and% accordingly% !oid. $n other words% substanti!e
ultra vires means the delegated legislation goes beyond the
scope of the authority conferred on it by the parent statute. $t
is a fundamental principle of law that a public authority cannot
act outside the powers i.e.% ultra vires% and it has been rightly
described as the central principle and foundation of large part
of administrati!e law by Prof. Wade in his Treatise on
*dministrati!e Law. The act which is for any reason in eDcess
of power is ultra vires.
$n $ndian @Dpress 7ewspapers !. Inion of $ndia" *$R 1&=4
-# '1'% @.-.Cen1ataramaiah% /. 9as he then was: stated 9para
;3: ,
) piece of subordinate legislation does not carry the
same degree of immunity which is enjoyed by a statute
passed by a competent Kegislature. 1ubordinate
legislation may be +uestioned on any of the grounds on
which plenary legislation is +uestioned. In addition it may
also be +uestioned on the ground that it does not
conform to the statute under which it is made. It may
further be +uestioned on the ground that it is contrary to
some other statute. :hat is because subordinate
legislation must yield to plenary legislation. It may also
Page 47 of 162
be +uestioned on the ground that it is unreasonable'
unreasonable not in the sense of not being reasonable'
but in the sense that it is manifestly arbitrary;.
$n the same case% the #ourt also opined that the power
delegated by the statute to the delegate is limited by its terms
and subordinate to its objects. The delegate must act in good
faith% reasonably% intra vires the power granted and on
rele!ant consideration of material facts. $t has also stated that
all his decisions must be in harmony with the #onstitution and
other laws of the landH if they are manifestly unjust or
oppressi!e or outrageous or directed to an unauthorised end or
do not tend in some degree to the accomplishment of the
objects of delegation% #ourt might well say% Legislature ne!er
intended to gi!e authority to ma1e such regulations% they are
unreasonable and ultra vires. Thus% delegated legislation or
subordinate legislation can be held !alid only if it conforms
eDactly to the power granted. Regulations% whether made
under the #onstitution or a statute% must be intra vires the
parent law under which power has been delegated. $f the
regulation8ma1ing power is conferred and the regulations
made are in eDcess of that power the regulation would be !oid
e!en if the *ct pro!ided that they shall ha!e effect as if
enacted in the *ct. The !alidity of the regulation is always
open to challenge on the ground that it is unauthorised. The
!alidity of the delegated legislation is a "uestion of !ires% that
is% whether or not the power has been eDceeded or otherwise
wrongfully eDercised or is inconsistent with the parent *ct.
The doctrine of ultra vires "uite often is one of the
recognised principles>grounds to in!alidate a delegated
Page 48 of 162
legislation. The basic principle of this doctrine is that an
authority being the creature of the law it has only such powers
as are granted to it by the law.
6eclaring a rule in the Garnata1a +otor Cehicle Rules%
1&43 ultra vires the +otor Cehicles *ct% 1&3& as the rule was
inconsistent with a section in the *ct% the -upreme #ourt% in
-tate of Garnata1a !. A.5anesh Gamath% *$R 1&=3 -# ''(% held
that the rule8ma1ing power cannot include within its scope the
power to ma1e a rule contrary to the pro!isions of the *ct
conferring the rule8ma1ing power and that conferment of rule8
ma1ing power by an *ct does not enable the rule8ma1ing
authority to ma1e a rule which tra!els beyond the scope of the
enabling *ct or which is inconsistent therewith or repugnant
thereto. The *peD #ourt in -tate of I.P. !. Renusagar Power
#o.% reported in *$R 1&== -# 1;3;% held 9Para ;4: ,
If the exercise of power is in the nature of subordinate
legislation' the exercise must conform to the provisions
of the statute. )ll the conditions of the statute must be
fulfilled. :hus' delegated legislation repugnant to' or
inconsistent with or in contravention of' or in excess of'
or overriding the provisions of' the parent )ct is ultra
vires.
Thus% it is clear that if power is conferred to legislate only
with respect to certain topics or for certain purposes or in
certain circumstances% the limits of the power must not be
crossed. <or this purpose% the phraseology of the delegating
pro!ision becomes rele!ant. $n applying the doctrine% the #ourt
has a three8fold tas1 , first% to determine the meaning of the
words used in the *ct itself to describe the delegated
legislation which the delegate is authorised to ma1eH secondly%
Page 49 of 162
to determine the meaning of the subordinate legislation itself%
and% finally% to decide whether the subordinate legislation
complies with that description.
$t also needs to be emphasised before proceeding further
to deal with the contention of the learned counsel for the
petitioner% that in e!aluating the vires of the delegated
legislation% the #ourts start with the presumption of
constitutionality% competence and reasonableness of the
delegated legislation impugned before it just as the #ourts do
in respect of primary legislation by the legislature. *s a general
proposition% delegated legislation is regarded as !alidly made%
and part of the law of the land% until a #ourt decides otherwise.
$n Aoffman8La Roche !. -ecretary of -tate for Trade and
$ndustry% 91&;': *# 2&'% Lord 6iploc1 spea1ing for the Aouse
of Lords referred to this aspect and obser!ed ,
......the presumption that subordinate legislation is intra
vires prevails in the absence of rebuttal' and that it
cannot be rebutted except by a party to legal
proceedings in a !ourt of competent jurisdiction who has
locus standi to challenge the validity of the subordinate
legislation in +uestion.;
Thus% the #ourt while re!iewing the !alidity of a
delegated legislation% should presume such delegated
legislation prima facie to be intra vires and it is for the person
aggrie!ed to pro!e affirmati!ely that the presumption in fa!our
of constitutionality% competence% fairness and reasonableness
is unsustainable as held by the *peD #ourt in -tate of I. P. !.
0aburam% *$R 1&41 -# ;'1. The onus of establishing in!alidity
is on the challenger.
Page 50 of 162
The "uestion whether a particular delegated legislation is
in eDcess of the power of the supporting legislation conferred
on the delegate% has to be determined with regard not only to
specific pro!isions contained in the rele!ant statute conferring
the power to ma1e rule or regulation% but also the object and
purpose of the *ct as can be gathered from the !arious
pro!isions of the enactment. $t would be wholly wrong for the
#ourt to substitute its own opinion as to what principle or
policy would best ser!e the objects and purposes of the *ct%
nor is it open to the #ourt to sit in judgment of the wisdom% the
effecti!eness or otherwise of the policy% so as to declare a
regulation to be ultra vires merely on the ground that% in the
!iew of the #ourt% the impugned pro!ision will not help to carry
through the object and purposes of the *ct. The -upreme
#ourt reiterated the legal position% well established by a long
series of decisions% in +aharashtra -tate 0oard of -econdary
and Aigher -econdary @ducation and another !. Paritosh
0hupesh1umar -heth and others% *$R 1&= -# 1'3% at para
1 as under ,
;1o long as the body entrusted with the task of framing
the rules or regulations acts within the scope of the
authority conferred on it' in the sense that the rules or
regulations made by it have a rational nexus with the
object and purpose of the statute' the court should not
concern itself with the wisdom or efficaciousness of such
rules or regulations. It is exclusively within the province
of the legislature and its delegate to determine' as a
matter of policy' how the provisions of the statute can
best be implemented and what measures' substantive as
well as procedural would have to be incorporated in the
rules or regulations for the efficacious achievement of
the objects and purposes of the )ct. It is not for the !ourt
to examine the merits or demerits of such a policy
because its scrutiny has to be limited to the +uestion as
Page 51 of 162
to whether the impugned regulations fall within the scope
of the regulation-making power conferred on the
delegate by the statute.;
*pplying the aforenoted test% we are unable to hold that
the impugned circular amounts to impermissible delegation of
legislati!e power. *n o!erall responsibility to find out the well
being of a 0an1ing #ompany% in impro!ing monetary stability
and economic growth as well as 1eeping in !iew the interests
of depositors% the Reser!e 0an1 of $ndia has to formulate its
policy !is8a8!is 0an1ing #ompanies. 20an1ing2 as defined in
-ection '9b: only gi!es a grammatical meaning of the
transactions of a ban1 and nothing more. $f any management
or super!ision is to be done o!er the ban1ing acti!ities of a
ban1% it will ha!e to be go!erned by ban1ing policy. The
2ban1ing policy2 and 2ban1ing2 are not independent but co8
ordinating subjects and both are co!ered within the
super!isory powers of the Reser!e 0an1 of $ndia within the
meaning of -ection 3'* of the 0an1ing Regulation *ct. @!en
otherwise% the directions issued by the Reser!e 0an1 of $ndia
are in the larger interest of the public and it being a body of
eDperts in ban1ing% the directions gi!en by it should not be
lightly brushed aside.
STATUTOR2 STATUS O3 THE CIRCULAR '
The abo!e ta1es us now to deal with the submission as
regards the statutory status of the +aster #ircular.
$t has been strenuously contended before us by the
Page 52 of 162
learned ad!ocates appearing on behalf of the petitioners that
the impugned +aster #ircular has no force in law and cannot
be termed as a statutory circular. $n short% the sum and
substance of the submission can!assed on behalf of the
petitioners is that% if the Reser!e 0an1 of $ndia wanted to issue
a +aster #ircular laying down a policy for declaring the
borrowers as willful defaulters and the conse"uences of the
same% then the same could ha!e been done only by enacting a
law within the meaning of *rticle 13 of the #onstitution of
$ndia% otherwise a circular will ha!e no force of law.
We are not impressed e!en by such submission as we
ha!e already indicated in our earlier part of the judgment the
source of power and the eDercise of the same by the Reser!e
0an1 of $ndia in the interest of ban1ing and ban1ing policy.
$t is clear that the +aster #ircular has been issued with a
particular object. Whether a circular issued by a statutory
authority would be binding or not% or whether the same has a
statutory force or not% would depend upon the nature of the
statute. <or the said purpose% the intention of the Legislature
must be considered.
The -upreme #ourt% in the case of -udhir -hantilal +ehta
!. #.0.$.% *$R 2((& -#W ';(&% had the occasion to consider an
identical issue. $n that case% the circular was issued by the
Reser!e 0an1 of $ndia eDercising control o!er the ban1ing
companies. The -upreme #ourt made the following
obser!ations% which are worth noting ,
Page 53 of 162
...Baving regard to the fact that the #eserve &ank of
India exercises control over the &anking !ompanies' we
are of the opinion that the said !ircular letter was binding
on the &anking !ompanies. :he officials of J!D &ank
were' therefore' bound by the said circular letter.
:he 2adhya radesh Bigh !ourt in :he 1tate of 2adhya
radesh v. #amcharan H)I# (*EE 2 F@I held-
;F. )lthough the !onstitution does not contain any
generic definition of law' it defines ;law; for
purposes of )rticle (5 to include ;any Drdinance'
order' bye-law' rule' regulation' notification' custom
or usage having in the territory of India the force of
law;. )rticle 5FF6(9. of the !onstitution also defines
the expression ;existing law; to mean ;any law'
Drdinance' Drder' bye-law' rule or regulation passed
or made before the commencement of this
!onstitution by any legislature authority or person
having power to make such law' Drdinance' order'
bye- law' rule or regulation;. )nother definition
which is relevant here is the definition of the
expression ;Indian law; in the 8eneral !lauses )ct'
(@*E. 1ection 56$*. of this )ct defines ;Indian Kaw;
to mean ;any )ct' Drdinance' regulation' rule' order
or bye-law' which before the commencement of the
!onstitution had the force of law in any rovince of
India or part thereof and hereafter has the force of
law in any art ) 1tate or art ! 1tate or part
thereof' but does not include any )ct of arliament
of the Jnited Aingdom or any Drder in !ouncil' rule
or other instrument made under such )ct;. :hese
definitions go to confirm that under our legal order
;law; does not include only legislative enactments
but it also includes rules' orders' notifications etc.
made or issued by the 8overnment or any
subordinate authority in the exercise of delegated
legislative power.
... E. :he +uestion relating to a post-constitution
order or notification in the context whether it
amounts to law was considered by the 1upreme
Page 54 of 162
!ourt in Nayantilal )mratlal v F. <. #ana' )I# (*FC
1! FC@. ...:he !ourt further observed as follows-
;:his is not to say that every order issued by
an executive authority has the force of law. If
the order is purely administrative' or is not
issued in exercise of any statutory authority it
may not have the force of law. &ut where a
general order is issued even by an executive
authority which confers power exercisable
under a statute' and which thereby in
substance modifies or adds to the statute'
such conferment of powers must be regarded
as having the force of law.; ...;
The issue as regards the statutory force of a circular is no
longer res integra. The -upreme #ourt% in the case of 0.).$.
<inance Ltd. !. The #ustodian and others% *$R 1&&; -# 1&'2%
and #entral 0an1 of $ndia !. Ra!indra and others% *$R 2((1 -#
3(&'% has eDamined such issue at length. While eDamining the
-ecurities #ontracts 9Regulation: *ct and the 0an1ing
Regulation *ct in 0.).$. <inance Ltd.9supra:% the -upreme #ourt
specifically dealt with the pro!isions of -ection 3491:9a: which
empowers the R0$ to auction or prohibit the ban1ing
companies generally or any ban1ing company in particular
against entering into any particular transaction and generally
to gi!e ad!ice to any ban1ing companies% and held that a
circular issued by the R0$ which stated that the ban1s were
ad!ised to follow the 5uidelines gi!en thereunder% the word
2ad!ised2 cannot be read in isolation and the said document
was meant to be binding on the ban1ing companies.
$n the case of #entral 0an1 of $ndia 9supra:% the -upreme
#ourt obser!ed that the R0$ is a prime ban1ing institution of
Page 55 of 162
the country entrusted with a super!isory role o!er ban1ing and
conferred with the authority of issuing binding directions%
ha!ing statutory force% in the interest of public in general and
pre!enting ban1ing affairs from deterioration and prejudice as
also to secure the proper management of any ban1ing
company generally. $t was further obser!ed as below ,
...#&I has been issuing directions3circulars from time to
time which' inter alia' deal with rate of interest which can
be charged and the periods at the end of which rests can
be struck down' interest calculated thereon and charged
and capitalised. It should continue to issue such
directives. Its circulars shall bind those who fall within the
net of such directives. For such transaction which are not
s+uarely governed by such circulars' the #&I directives
may be treated as standards for the purpose of deciding
whether the interest charged is excessive' usurious or
opposed to public policy.
#$%&' ()*%+ ,$ -A).A .)A# '
The abo!e ta1es us to deal with the contention as
regards the !alidity of the +aster #ircular on the basis of the
application of the maDim 4nemo judex in causa sua4. The
substance of the argument of the learned ad!ocates appearing
on behalf of the petitioners is that the ban1 itself will be a
judge in its own cause% and in such circumstances% there will
always be an element of personal bias which ultimately would
affect the interest of the borrowers.
7atural justice as is well81nown is founded on two basic
principles,
Page 56 of 162
9a: *udi alteram partem.
9b: 7emo judeD in causa sua.
The duty to act fairly is the theme of the principles of
natural justice. Aowe!er% the eDtent of the duty to act fairly will
normally be !ery limited where the authority eDercises a
function which does not culminate in a binding decision. The
rule generally applies% at least with full force% only to the
conduct leading directly to a final act of the decision% and not
to the ma1ing of a preliminary decision or to an in!estigation
designed to obtain information for the purpose of a report or a
recommendation on which a subse"uent decision may be
founded. 9see Aalsbury2s Laws of @ngland% Col.19i:% th @dition%
paras =' and &.:
The standard of fairness may be different where the
proceedings are in in"uisitorial form.
0ias can be classified under three different heads,
9a: a legal interests which mean that the /udge is Lin such
a position that a bias must be assumed.L
9b: pecuniary interest.
9c: personal bias.
Law in this regard has eDpanded to a great eDtent. $n
/.<.5arner2s *dministrati!e Law% it was stated,
Page 57 of 162
;:he natural justice 4bias4 rule looks to external
appearances rather than to proof of actual improper
exercise of power. If the reasonable observer would have
the re+uisite degree of suspicion of bias in the decision-
maker then that decision can be challenged. It is a
matter of the courts ensuring that 4justice is seen to be
done4. 1ince successful challenge is based on
appearances' it is natural that the types of matter to
which the rule applies is somewhat confined. )s we shall
see it clearly applies to judicial and disciplinary functions
but not generally more widely to administrative decision-
making and actions.;
$n +ana1 Lal !. 6r.Prem #hand% *$R 1&'; -# 2'% the
-upreme #ourt obser!ed 9at p. 2&: ,88
;&ut where pecuniary interest is not attributed but
instead a bias is suggested' it often becomes necessary
to consider whether there is a reasonable ground for
assuming the possibility of bias and whether it is likely to
produce in the minds of the litigant or the public at large
a reasonable doubt about the fairness of the
administration of justice. It would always by a +uestion of
fact to be decided in each case. 4:he principle4' says
Balsbury' 4nemo debet esse judex in causa propria sua
precludes a justice' who is interested in the subject-
matter of a dispute' from acting as a justice therein4. In
our opinion' there is and can be no doubt about the
validity of this principle and we are prepared to assume
that this principle applies not only to the justice as
mentioned by Balsbury but to all tribunals and bodies
which are given jurisdiction to determine judicially the
rights of parties;.
$n *ndhra Pradesh -tate Road Transport #orporation%
Ayderabad !. -ri -atyanarayana Transports 9P: Ltd.% 5untur%
*$R 1&4' -# 13(3% the -upreme #ourt held that the
elementary rule of natural justice that person trying a cause%
Page 58 of 162
though in a "uasi8judicial proceeding% should not suffer from a
personal bias. $n this case the proceedings before the ban1 of
in"uiry is not a "uasi8judicial proceedings. The *peD #ourt
stated 9at p. 13(;: ,
;,e ought' however' to add that in the light of the
general considerations which we have set out' it is of
utmost importance that in appreciating evidence' the
!ourt ought to adopt a very cautious' circumspect' and
careful approach. If the evidence led by the parties in
such a case is tested by cross-examination' it would be
easier to determine where truth lies. &ut in the absence
of cross-examination' appreciating the effect of
competing affidavits is hot an easy matter. In such a
case' the !ourt must always en+uire on which side the
probabilities lie and must scrutinise the affidavits very
critically to determine which of them deserves to be
believed. <aturally' in dealing with such a +uestion of
fact in appeal' we are normally inclined to attach
importance to the findings of fact recorded by the Bigh
!ourt itself.;
Recently% in the case of Inion of $ndia !. Cipan Gumar
/ain% 92((':& -## ';&% the -upreme #ourt held that an officer
who had carried out a search under -ection 132 of the $ncome
TaD *ct% 1&41% was competent to act as an assessing officer
and there was no inherent infirmity or defect in permitting the
assessing officer to gather information and assess the !alue of
the information himself. The -upreme #ourt referred to a
decision of the I.-. -upreme #ourt in the case of Aarold
Withrow !. 6uane Lar1en and obser!ed thus ,
7ven though it could be said that in a sense since the
)ssessing Dfficer was acting on behalf of the #evenue' in
discharging the functions as an )ssessing Dfficer' he was
a party to the dispute' nevertheless there is no
presumption of bias in such a situation. )s said in
Page 59 of 162
B.!.<arayanappa and others v. :he 1tate of 2ysore and
others' (*F9 1!#65. EC$ at p E%5-
;It is also true that the 8overnment on whom the
duty to decide the dispute rests' is substantially a
party to the dispute but if the 8overnment or the
authority to whom the power is delegated acts
judicially in approving or modifying the scheme' the
approval or modification is not open to challenge on
a presumption of bias. :he 2inister or the officer of
the 8overnment who is invested with the power to
hear objections to the scheme is acting in his official
capacity and unless there is reliable evidence to
show that he is biased' his decision will not be liable
to be called in +uestion' merely because he is a
limb of the 8overnment.
$n 6elhi <inancial #orporation and another !. Raji! *nand
and others% 2(( 11 -## 42'% the -upreme #ourt eDamined
the said principle% with reference to -ection 3285 of the -tate
<inancial #orporation *ct% 1&'1% as the -tate 5o!ernment had
appointed the +anaging 6irector of the -tate <inancial
#orporation as the authority to adjudicate the claims of the
-tate <inancial #orporation and issue certificates of reco!ery.
$n 6elhi <inancial #orporation 9supra: after referring to the
se!eral case laws on the subject% it was held as under ,
*. Faced with this authority' it was submitted that the
observations made by the !onstitution &ench are per
incuriam inasmuch as this authority has not taken note of
the judgment in 8ullapalli <ageswara #ao case. ,e are
unable to accept this submission. It is to be seen that
there is a big difference in the facts of the two cases. :he
doctrine that 4no man can be a judge in his own cause4
can be applied only to cases where the person concerned
has a personal interest or has himself already done some
act or taken a decision in the matter concerned.
2erely because an officer of a corporation is named to be
the authority' does not by itself bring into operation the
Page 60 of 162
doctrine 4no man can be a judge in his own cause4. Df
course' in individual cases bias may be shown against a
particular officer but in the absence of any proof of
personal bias or connection merely because officers of a
particular corporation are named as the authority does
not mean that those officers would be biased. )s has
been held by the !onstitution &ench' a 2anaging
/irector is a high-ranking officer. Be is not personally
interested in the transaction. :here is no +uestion of any
bias or conflict between his interest and his duty.
In 8ullapalli <ageswara #ao case the 1ecretary who had
framed the 1cheme then proceeded to hear the
objections and advise the !hief 2inister. It is because of
the personal involvement of the 1ecretary that the
majority took the view. 7ven then two Nudges held that it
did not follow that he was an improper person to hear the
objections.
(C. :hus' the authorities disclose that mere
appointment of an officer of the corporation does not by
itself bring into play the doctrine that 4no man can be a
judge in his own cause4. For that doctrine to come into
play it must be shown that the officer concerned has a
personal bias or a personal interest or has personally
acted in the matter concerned and3or has already taken a
decision one way or the other which he may be
interested in supporting. :his being the law it will have to
be held that the decision of the /elhi Bigh !ourt is
erroneous and cannot be sustained and the view taken
by the unjab and Baryana Bigh !ourt is correct.
It will' therefore' have to be held that 2anaging /irector
of a financial corporation can be appointed as an
authority under 1ection 5$-8 of the )ct.
Thus% from the abo!e% if we are permitted to add% it
ma1es a little difference% whether Eli1elihoodF could be
e"uated with EpossibilityF or EprobabilityF. $t all depends upon
how the court loo1s with the judicial hindsight at the
adjudicating authority and in particular at his beha!iour in
conducting the proceedings% his attitude towards the aggrie!ed
Page 61 of 162
party% his attachment to the cause and his frame of mind%
whether preconcei!ed or not. *fter getting the sum total of all
these% the court must as1% whether it would be enough to
erode the detachment and impartiality of the adjudicating
authority. $f there was any li1elihood of such erosion% the
decision complained of must be struc1 down so that the
streams of justice may be 1ept clear and pure% which is the
basic re"uirement of administration of justice. Therefore% it
would all depend on a case to case basis. $n a gi!en case% if the
court finds the action to be tainted with malafides or bias% then
the same could always be condemned and set at right.
Aowe!er% only on the apprehension of misuse of such
pro!ision% an otherwise !alid statute should not be struc1 down
or condemned.
$t is e"ually well8settled that a mere possibility or
li1elihood of abuse of power does not ma1e the pro!ision ultra
vires or bad in law. $n the aforesaid conteDt% we may "uote
with profit a decision of the -upreme #ourt in the case of
People2s Inion for #i!il Liberties !. Inion of $ndia% *$R 2(( -#
'4% wherein the challenge was with regard to the
constitutional !alidity of Pre!ention of Terrorism *ct 91' of
2((2: 9P)T*:. The -upreme #ourt obser!ed that a mere
possibility of abuse or misuse of P)T* could not be a ground to
declare it unconstitutional. The court cannot go into and
eDamine the need of P)T*. The -upreme #ourt obser!ed that
it was a matter of policy. )nce the legislation was passed% the
5o!ernment had an obligation to eDercise all a!ailable options
to pre!ent terrorism within the bounds of the #onstitution.
+oreo!er% mere possibility of abuse could not be counted as a
ground for denying the !esting of powers or for declaring a
Page 62 of 162
statute unconstitutional.
The -upreme #ourt in the case of -ushil Gumar -harma
!. Inion of $ndia and others% 92((':4 -## 2=1% held as under ,
(F. )s observed in 2aulavi Bussein Baji )braham Jmarji
v. 1tate of 8ujarat' Jni+ue &utyle :ube Industries 6. Ktd.
v. J.. Financial !orpn. and adma 1undara #ao v. 1tate
of :.<. while interpreting a provision' the !ourt only
interprets the law and cannot legislate it. If a provision of
law is misused and subjected to the abuse of the process
of law' it is for the legislature to amend' modify or repeal
it' if deemed necessary.
$n a nine8/udge 0ench decision of the -upreme #ourt in
the case of $.R.#oelho 9dead: by L.Rs. !. -tate of T.7.% *$R 2((;
-# =41% the -upreme #ourt made the following obser!ations%
which are worth noting ,
It is also contended that the power to pack up laws in
the <inth 1chedule in absence of any indicia in )rticle
5(& has been abused and that abuse is likely to continue.
It is submitted that the <inth 1chedule which
commenced with only (5 enactments has now a list of
$@C enactments. :he validity of )rticle 5(& is not in
+uestion before us. Further' mere possibility of abuse is
not a relevant test to determine the validity of a
provision. :he people' through the !onstitution' have
vested the power to make laws in their representatives
through arliament in the same manner in which they
have entrusted the responsibility to adjudge' interpret
and construe law and the !onstitution including its
limitation in the judiciary. ,e' therefore' cannot make
any assumption about the alleged abuse of the power.
ARTICLE &67&87.8 9 UNREASONABLE RESTRICTION '
The abo!e ta1es us to deal with the submission as
Page 63 of 162
regards the imposition of an unreasonable restriction upon the
promoters>entrepreneurs>directors in the form of debarring
them from a!ailing of any additional facilities for floating a new
!enture for a period of fi!e years from the date the name of
the willful defaulter is published in the list of 2willful defaulters2
by the Reser!e 0an1 of $ndia. -uch unreasonable restriction%
according to the petitioners% is !iolati!e of *rticle 1&91:9g: of
the #onstitution of $ndia i.e. the right to carry on any
profession% or to carry on any occupation% trade or business.
*ccording to the learned ad!ocates appearing on behalf
of the petitioners% e!en if it is accepted that the Reser!e 0an1
of $ndia has the power to issue the impugned circular as a
policy decision to curb the menace of the 7P* and in larger
public interest% yet the Reser!e 0an1 of $ndia cannot debar any
other ban1 or financial institution from lending money to the
promoter of the company for a new !enture or a project.
$t is true that right to do business is a fundamental right
guaranteed under *rticle 1&91:9g: of the #onstitution of $ndia%
but this right is subject to reasonable restriction under *rticle
1&94: of the #onstitution of $ndia.
To test the reasonability of a restriction% the court must
see the subject matter% eDtent of restriction% the mischief
which it see1s to chec1% etc.
$n the aforesaid conteDt% we may "uote with profit a
decision of the -upreme #ourt in the case of +d.+urta?a !.
-tate of *ssam% 2(119&: -#*L@ '24. The -upreme #ourt
considered the issue as regards *rticle 1&91:9g: of the
Page 64 of 162
#onstitution of $ndia although in an altogether different factual
bac1ground% yet the principle propounded and eDplained would
be applicable to the case at hand. The obser!ations of the
-upreme #ourt in paragraphs 1( to 1= are worth noting ,
(9. It may be mentioned that to test the reasonability of
a restriction we have to see the subject matter' extent of
restriction' the mischief which it seeks to check' etc. :he
reasonableness of the restriction has to be determined in
an objective manner and has to be seen from the point of
view of the interest of the general public and not merely
from the point of view of the persons upon whom the
restrictions are imposed vide Banif Muareshi v. 1tate of
&ihar' )I# (*%@ 1! E5(. 2oreover' the impugned action
of the authorities cannot be said to be unreasonable
merely because in a given case' they may operate
harshly' vide 1tate of 8ujarat v. 1hantilal' )I# (*F* 1!
F5C 6vide ara %$.. )s observed by the 1upreme !ourt in
Kaxmi Ahandsari v. 1tate of J.' )I# (*@( 1! @E50 /ivert
v. 1tate of 8ujarat' )I# (*@F 1! (5$50 1tate of 2adras v.
#ow' (*%$ 1!# %*E0 eerless v. #eserve &ank' )I# (**$
1! (9550 and Barakchand v. Jnion of India' )I# (*E9 1!
(C%5 etc.' the nature of the right alleged to have been
infringed' the underlying purpose of the restriction
imposed and the extent and urgency of the evil sought to
be remedied thereby' disproportion of the imposition'
prevailing conditions at the time etc.' are the relevant
considerations for determining whether the restriction is
reasonable.
((. Further' as held in Nyoti ershad v. Jnion :erritory of
/elhi' )I# (*F( 1! (F9$' the standard of reasonableness
must also vary from age to age and be related to the
adjustments necessary to solve the problems which
communities face from time to time. In adjudging the
validity of the restriction the !ourt has necessarily to
approach the +uestion from the point of view of the social
interest which the 1tate action intends to promote' vide
uthumma v. 1tate of Aerala' )I# (*E@ 1! EE(0 ..
7nterprises v. Jnion of India' )I# (*@$ 1! (9(F and Nyoti
ershad v. Jnion :erritory of /elhi 6supra.' etc.
Page 65 of 162
($. Nudged by these standards the impugned action of
the authorities cannot be faulted on the ground of lack of
reasonableness. )s stated in the counter-affidavits filed
in these cases' the existing wholesale markets have
become the cause of immense traffic congestion in the
city' apart from causing diseases' pollution etc. Bence'
shifting the wholesale markets to the outskirts of the !ity
or beyond is clearly reasonable.
(5. It must be remembered that certain matters are by
their very nature such as had better be left to the
administrative authorities instead of !ourts themselves
seeking to substitute their own views and perceptions as
to what is the best solution to the problem. :he present
is clearly an instance where this !ourt should not
interfere with the steps taken by the respondents to
resolve a pressing problem. In matters of policy the
!ourts have a limited role and it should only interfere
with the same when it is clearly illegal. :hat clearly is not
the case here. :he impugned action is a salutary step for
undoing a mischief' which was crying out for redress for a
long time' and it is not illegal.
(C. )s observed by the 1upreme !ourt in 2ohd. Banif
Mureshi v. 1tate of &ihar' )I# (*%@ 1! E5(' the !ourt
must presume' that the legislature understands and
correctly appreciates the need of its own people. :he
legislature is free to recogniOe degrees of harm' and may
confine its restrictions to those where the need is
deemed to be the clearest. In our opinion' the same
principle would apply to executive action also' unless
there is clear violation of a statute or a constitutional
provision.
(%. In our opinion' the 1tate should not be hampered by
the !ourt in dealing with evils at their point of pressure.
)ll legislation' including delegated legislation 6such as
the kind we are examining. and executive action is
essentially ad hoc. 1ince' social problems nowadays are
extremely complicated' this inevitably entails special
treatment for distinct social phenomena. If legislation or
executive action is to deal with realities it must address
itself to variations in society. :he 1tate must' therefore'
Page 66 of 162
be left with wide latitude in devising ways and means of
social control and #egulation' and the !ourt should not'
unless compelled by the law' encroach into this field.
(F. )s Nustice Frankfurter of the J.1. 1upreme !ourt
observed in )merican Federation of Kabour v. )merican
1ash and /oor !o.' 55% J1 %5@ 6(*C*. --
;7ven where the social undesirability of a law may
be convincingly urged' invalidation of the law by a
!ourt debilitates popular /emocratic 8overnment.
2ost laws dealing with social and economic
problems are matters of trial and error. :hat which
before trial appears to be demonstrably bad may
belie prophecy in actual operation. &ut' even if a
law is found wanting on trial' it is better that its
defects should be demonstrated and removed by
the legislature than that the law should be aborted
by judicial fiat. 1uch' an assertion of judicial power
defeats responsibility from those on whom in a
democratic society it ultimately rests. Bence' rather
than exercise judicial review !ourts should
ordinarily allow legislatures to correct their own
mistakes wherever possible.;
In our opinion the same principle would apply to
executive action too.
(E. 1imilarly' in his dissenting judgment in <ew 1tate Ice
!o. v. Kiebemann' $@% J.1. $F$ 6(*5$.' 2r. Nustice
&randeis' the celebrated Nudge of the J.1. 1upreme !ourt
observed that the government must be left free to
engage in social experiments. rogress in the 1ocial
1ciences' as in the hysical 1ciences' depends on ;a
process of trial and error; and !ourts must not interfere
with necessary experiments.
(@. Nustice &randeis also observed --
:o stay experimentation in things social and
economic is a grave responsibility. /enial of the
right to experiment may be fraught with serious
conse+uences to the <ation.
Page 67 of 162
Thus% from the abo!e% it could be said that ha!ing regard
to the object with which the Reser!e 0an1 of $ndia issued the
+aster #ircular and the policy decision to declare the
promoters of the company as willful defaulters% it could not be
said that the same is an unreasonable restriction !iolating
*rticle 1&91:9g: of the #onstitution of $ndia.
To sum up% the impugned circular does not suffer from
the vice of lac1 of power. $t has been issued in the interest of
the ban1ing business and is% thus% in public interest. $t see1s to
ensure greater transparency and uniformity in identification
and treatment of the willful defaulters. $t targets defaulters of
dues in eDcess of Rs.2' lac% thus laying down the threshold
limit for application of the circular. $t applies to only those
defaulters who can be categori?ed as EwillfulF as defined in the
circular. $t% thus% does not co!er those borrowers who are
unable to pay the debt without there being any element of
willfulness. -urely% no borrower can claim a !ested right to
see1 financial assistance from a ban1 or a financial institution
no matter how willful or chronic his defaults in repayment of
past dues may ha!e been. The circular% therefore% in general
terms% is not arbitrary.
Aowe!er% the matter does not rest o!er here. There is a
grey area which we ha!e been able to identify so far as the
issue of unreasonable restriction and arbitrariness in the policy
decision of the Reser!e 0an1 of $ndia is concerned.
Page 68 of 162
We ha!e noticed that the +aster #ircular which pro!ides
for the guidelines pertaining to Ewillful defaultF and Ewillful
defaulterF embraces within it e!en the directors of the
company.
We may% once again% at the cost of repetition% highlight
few pro!isions of the #ircular which% in our opinion% deser!e
consideration. $n clause 92.':% which relates to penal measures%
sub8clause 9d: reads as under ,
6d. ) covenant in the loan agreements' with the
companies in which the banks3notified FIs have
significant stake' should be incorporated by the banks3FIs
to the effect that the borrowing company should not
induct a person who is a promoter or director on the
&oard of a company which has been identified as a willful
defaulter as per the definition at paragraph $.( above
and that in case' such a person is found to be on the
&oard of the borrower company' it would take
expeditious and effective steps for removal of the person
from its &oard.
#lause 9': is with regard to reporting names of the
directors. #lauses 9'.1: and 9'.2: read as under ,
%.( <eed for 7nsuring )ccuracy
#&I3!redit Information !ompanies disseminate
information on non-suit filed and suit filed accounts
respectively' as reported to them by the banks3FIs and
responsibility for reporting correct information and also
accuracy of facts and figures rests with the concerned
banks and financial institutions. :herefore' banks and
financial institutions should take immediate steps to up-
date their records and ensure that the names of current
directors are reported. In addition to reporting the names
Page 69 of 162
of current directors' it is necessary to furnish information
about directors who were associated with the company at
the time the account was classified as defaulter' to put
the other banks and financial institutions on guard. &anks
and FIs may also ensure the facts about directors'
wherever possible' by cross-checking with #egistrar of
!ompanies.
%.$ osition regarding Independent and <ominee
directors
rofessional /irectors who associate with companies for
their expert knowledge act as independent directors.
1uch independent directors apart from receiving
director4s remuneration do not have any material
pecuniary relationship or transactions with the company'
its promoters' its management or its subsidiaries' which
in the judgment of &oard may affect their independent
judgment. )s a guiding principle of disclosure' no
material fact should be suppressed while disclosing the
names of a company that is a defaulter and the names of
all directors should be published. Bowever' while doing
so' a suitable distinguishing remark should be made
clarifying that the concerned person was an independent
director. 1imilarly the names of directors who are
nominees of government or financial institutions should
also be reported but a suitable remark 4nominee director4
should be incorporated. :herefore' against the names of
Independent /irectors and <ominee /irectors' they
should indicate the abbreviations Ind; and ;<om;
respectively in brackets to distinguish them from other
directors.
Thus% the abo!e ma1es it clear that all the directors
irrespecti!e of their type are brought within the pur!iew of the
circular for the purpose of declaring them as willful defaulters.
*lthough in clause 9'.2:% the Reser!e 0an1 of $ndia has tried to
clarify the position as regards the independent and nominee
directors% yet a plain reading of clause 9'.2: would suggest that
e!en the independent and nominee directors are not spared
but it would be within the discretion of the committee of high
Page 70 of 162
functionaries headed by the @Decuti!e 6irector to ta1e a
decision as regards the role of the independent and nominee
directors.
The circular spea1s about EdirectorF and Eindependent
and nominee directorF. The classification of the directors under
the #ompanies *ct is as under ,
A. -lassification /nder t!e -ompanies Act
-ategories of *irectors
:he !ompanies )ct refers to the following two specific
categories of /irectors-
(. 2anaging /irectors0 and
$. ,hole-time /irectors.
) 2anaging /irector is a /irector who has substantial
powers of management of the affairs of the company subject
to the superintendence' control and direction of the &oard in
+uestion. ) ,hole-time /irector includes a /irector who is in
the whole-time employment of the company' devotes his
whole-time of working hours to the company in +uestion and
has a significant personal interest in the company as his
source of income.
7very public company and private company' which is a
subsidiary of a public company' having a share capital of more
than Five !rore rupees 6#s. %'99'99'9993-. must have a
2anaging or ,hole-time /irector or a 2anager.
0/rt!er classification of *irectors
&ased on the circumstances surrounding their
appointment' the !ompanies )ct recogniOes the following
further types of /irectors-
Page 71 of 162
(. First /irectors- 1ubject to any regulations in the
)rticles of a company' the subscribers to the
2emorandum of )ssociation' or the company4s charter or
constitution 6;2emorandum;.' shall be deemed to be the
/irectors of the company' until such time when /irectors
are duly appointed in the annual general meeting
6;)82;..
$. !asual vacancies- ,here a /irector appointed at the
)82 vacates office before his or her term of office
expires in the normal course' the resulting vacancy may'
subject to the )rticles' be filled by the &oard. 1uch
person so appointed shall hold office up to the time which
the /irector who vacated office would have held office if
he or she had not so vacated such office.
5. )dditional /irectors- If the )rticles specifically so
provide or enable' the &oard has the discretion' where it
feels it necessary and expedient' to appoint )dditional
/irectors who will hold office until the next )82.
Bowever' the number of /irectors and )dditional
/irectors together shall not exceed the maximum
strength fixed in the )rticles for the &oard.
C. )lternate /irector- If so authoriOed by the )rticles or by
a resolution passed by the company in general meeting'
the &oard may appoint an )lternate /irector to act for a
/irector 6;Driginal /irector;.' who is absent for whatever
reason for a minimum period of three months from the
1tate in which the meetings of the &oard are ordinarily
held. 1uch )lternate /irector will hold office until such
period that the Driginal /irector would have held his or
her office. Bowever' any provision for automatic re-
appointment of retiring /irectors applies to the Driginal
/irector and not to the )lternate /irector.
%. 41hadow4 /irector- ) person' who is not appointed to
the &oard' but on whose directions the &oard is
accustomed to act' is liable as a /irector of the company'
unless he or she is giving advice in his or her professional
capacity. :hus' such a 4shadow4 /irector may be treated
as an 4officer in default4 under the !ompanies )ct.
Page 72 of 162
F. /e facto /irector- ,here a person who is not actually
appointed as a /irector' but acts as a /irector and is held
out by the company as such' such person is considered
as a de facto /irector. Jnlike a 4shadow4 /irector' a de
facto /irector purports to act' and is seen to the outside
world as acting' as a /irector of the company. 1uch a de
facto /irector is liable as a /irector under the !ompanies
)ct.
E. #otational /irectors- )t least two-thirds of the
/irectors of a public company or of a private company
subsidiary of a public company have to retire by rotation
and the term ;rotational /irector; refers to such /irectors
who have to retire 6and may' subject to the )rticles' be
eligible for re-appointment. at the end of his or her
tenure.
=. <ominee /irectors- :hey can be appointed by
certain shareholders' third parties through contracts'
lending public financial institutions or banks' or by the
!entral 8overnment in case of oppression or
mismanagement. :he extent of a nominee /irector4s
rights and the scope of supervision by the shareholders'
is contained in the contract that enables such
appointments' or 6as appropriate. the relevant statutes
applicable to such public financial institution or bank.
Bowever' nominee /irectors must be particularly careful
not to act only in the interests of their nominators' but
must act in the best interests of the company and its
shareholders as a whole.:he fixing of liabilities on
nominee /irectors in India does not turn on the
circumstances of their appointment or' indeed' who
nominated them as /irectors. !hapter C and !hapter %
that follow set out certain duties and liabilities that apply
to' or can be affixed on' /irectors in general. ,hether
nominee /irectors are re+uired by law to discharge such
duties or bear such liabilities will depend on the
application of the legal provisions in +uestion' the
fiduciary duties involved and whether such nominee
/irector is to be regarded as being in control or in charge
of the company and its activities. :his determination
ultimately turns on the specific facts and circumstances
involved in each case.
Page 73 of 162
B. -lassification /nder t!e 1isting Agreement
:he 1ecurities !ontracts 6#egulation. )ct' (*%F' read
with the rules and regulations made thereunder' re+uires
every company desirous of listing its shares on a recogniOed
Indian stock exchange' to execute a listing agreement
6;)greement;. with such Indian stock exchange. :his
)greement is in a standard format 6prescribed by the
1ecurities 7xchange &oard of India 6;17&I;..' as amended by
17&I from time to time. :he )greement provides for the
following further categories of /irectors-
-ategories /nder 1isting Agreement
(. 7xecutive /irector0
$. <on-executive /irector0 and
5. Independent /irector.
%2ec/tive and non3e2ec/tive *irectors
)n 7xecutive /irector can be either a ,hole-time
/irector of the company 6i.e.' one who devotes his whole time
of working hours to the company and has a significant
personal interest in the company as his source of income.' or a
2anaging /irector 6i.e.' one who is employed by the company
as such and has substantial powers of management over the
affairs of the company subject to the superintendence'
direction and control of the &oard.. In contrast' a non-
executive /irector is a /irector who is neither a ,hole-time
/irector nor a 2anaging /irector. !lause C* of the )greement
prescribes that the &oard shall have an optimum combination
of executive and non-executive /irectors' with not less than
fifty percent 6%9P. of the &oard comprising non-executive
/irectors. ,here the !hairman of the &oard is a non-executive
/irector' at least one-third of the &oard should comprise
independent /irectors and in case he is an executive /irector'
at least half of the &oard should comprise independent
/irectors. ,here the non-executive !hairman is a promoter of
the company or is related to any promoter or person
occupying management positions at the &oard level or at one
Page 74 of 162
level below the &oard' at least one-half of the &oard of the
company shall consist of independent /irectors.
,ndependent *irectors
:he )greement defines an ;Independent /irector; as a
non-executive /irector of the company who-
a. apart from receiving /irector4s remuneration' does not
have material pecuniary relationships or transactions
with the company' its promoters' its /irectors' its senior
management' or its holding company' its subsidiaries'
and associates which may affect independence of the
/irector0
b. is not related to promoters or persons occupying
management positions at the board level or at one level
below the board0
c. has not been an executive of the company in the
immediately preceding three 65. financial years0
d. is not a partner or an executive or was not a partner or
an executive during the preceding three 65. years' of any
of the following-
i. the statutory audit firm or the internal audit firm
that is associated with the company' and
ii. the legal firms and consulting firms that have a
material association with the company0
e. is not a material supplier' service provider or customer
or a lessor or lessee of the company' which may affect
the independence of the /irector0 or
f. he is not a substantial shareholder of the company' i.e.'
owning two percent 6$P. or more of the block of voting
shares0 and
Page 75 of 162
g. he is not less than twenty-one 6$(. years of age.
<ominee directors appointed by an institution that has
invested in' or lent money to' the company are also treated as
independent /irectors.
$n our opinion% all the directors cannot be held liable for
the default in repayment of the loan which might be for !aried
reasons beyond the control of such directors. We find some
element of arbitrariness in the policy of the Reser!e 0an1 of
$ndia.
We may profitably refer to the decision of the -upreme
#ourt in the case of 6war1adas +arfatia and -ons !. 0oard of
Trustees of the Port of 0ombay% reported in 91&=&: 3 -## 2&3%
wherein it was held that the -tate actions are amenable to
judicial re!iew only to the eDtent that the -tate must act
!alidly for a discernible reason% not whimsically for any ulterior
purpose. The obser!ations of Ais Lordship% -abyasachi
+u1herjee% /. 9*s the learned #hief /ustice then was: made in
paragraph 2' are worth noting.
E....... ,here there is arbitrariness in 1tate action' )rticle
(C springs in and judicial review strikes such an action
down. 7very action of the executive authority must be
subject to rule of law and must be informed by reason.
1o' whatever be the activity of the public authority' it
should meet the test of )rticle (C. ........
$n Gumari -hrile1ha Cidhyarthi and others !. -tate of I.P.
and others% reported in 91&&1:1 -## 212% the -upreme #ourt
made the following obser!ations in paragraphs 34 and 3; ,
Page 76 of 162
5F. :he meaning and true import of arbitrariness is
more easily visualiOed than precisely stated or defined.
:he +uestion' whether an impugned act is arbitrary or
not' is ultimately to be answered on the facts and in the
circumstances of a given case. An obvio/s test to
apply is to see w!et!er t!ere is any discernible
principle emerging from t!e imp/gned act and if
so" does it satisfy t!e test of reasonableness.
4!ere a mode is prescribed for doing an act and
t!ere is no impediment in following t!at
proced/re" performance of t!e act ot!erwise and
in a manner w!ic! does not disclose any
discernible principle w!ic! is reasonable" may
itself attract t!e vice of arbitrariness. %very .tate
action m/st be informed by reason and it follows
t!at an act /ninformed by reason" is arbitrary. #ule
of law contemplates governance by laws and not by
humour' whims or caprices of the men to whom the
governance is entrusted for the time being. It is trite that
be you ever so high' the laws are above you. :his is what
men in power must remember' always.
5E. )lmost a +uarter century back' this !ourt in 1.8.
Naisinghani v. Jnion of India indicated the test of
arbitrariness and the pitfalls to be avoided in all 1tate
actions to prevent that vice' in a passage as under-
,n t!is conte2t it is important to emp!asi5e
t!at t!e absence of arbitrary power is t!e
first essential of t!e r/le of law /pon w!ic!
o/r w!ole constit/tional system is based. ,n a
system governed by r/le of law" discretion"
w!en conferred /pon e2ec/tive a/t!orities"
m/st be confined wit!in clearly defined limits.
6!e r/le of law from t!is point of view means
t!at decisions s!o/ld be made by t!e
application of known principle or wit!o/t any
r/le it is w!ere !e is. ,f a decision is taken
wit!o/t any principle or wit!o/t any r/le it is
/npredictable and s/c! a decision is t!e
antit!esis of a decision taken in accordance
wit! t!e r/le of law. 6see /icey' Kaw of
!onstitution' (9th edn. Introduction' cx.. Kaw has
reached its finest moments' stated /ouglas' N. in
Page 77 of 162
Jnited 1tates v. ,underlich' when it has freed man
from the unlimited discretion of some rulerQ. ,here
discretion is absolute' man has always suffered. It is
in this sense that the rule of law may be said to be
sworn enemy of caprice. /iscretion' as Kord
2ansfield stated it is classic terms in the case of
Nohn ,ilkes' #means so/nd discretion g/ided by
law. ,t m/st be governed by r/le" not !/mo/r
it m/st not be arbitrary" vag/e and
fancif/l#.77
9@mphasis supplied:.
$t is well8settled that a company% be it a pri!ate or public%
being a juristic person% is different from an indi!idual as a
citi?en. <or all acts of the company each and e!ery director
need not be held responsible. $t would depend upon the role of
each of the directors so far as the day8to8day management and
affairs of the company are concerned.
We may gi!e one simple eDample. @!en when any penal
liability is to be fastened upon the company% pro!isions ha!e
been made in different enactments li1e the 7egotiable
$nstruments *ct% the Pre!ention of <ood *dulteration *ct% the
@ssential #ommodities *ct% the 6rugs and #osmetics *ct% etc.
relating to offences by companies pro!iding that if the person
committing an offence is a company% e!ery person who% at the
time the offence was committed% was incharge of% and was
responsible to the company for the conduct of the business of
the company% as well as the company% shall be deemed to be
guilty of the offence and shall be liable to be proceeded
against and punished accordingly. *ll the directors of the
company% irrespecti!e of their role in the day8to8day affairs and
functioning of the company% cannot be made liable unless the
Page 78 of 162
statute otherwise ma1es them liable for the same. This is
where the concept of piercing of the corporate !eil is applied
by the courts in !arious situations. Two situations where such
principle is consistently applied are% one where the statute
itself so permits or pro!ides for it% and the second% where due
to glaring facts established on record it is found that a compleD
web has been created only with a !iew to defraud the re!enue
interest of the ban1% thereby the re!enue interest of the -tate.
We may "uote with profit a 6i!ision 0ench decision of
this #ourt% to which one of us 9*1il Gureshi% /.: was a party% in
the case of Pra!inbhai +.Gheni !. *ssistant #ommissioner of
$ncome8TaD and others% 92(13:3'3 $TR '=' 95uj:% wherein it
has been eDplained in details the concept of lifting or piercing
the corporate !eil. Ais Lordship 9*1il Gureshi% /.: obser!ed
thus ,
....:he principle of lifting or piercing the corporate veil is
neither new nor unknown. It is however' not possible of
any precise definition or application in a straitjacket
formula. ,e may notice some of the authorities dealing
with such a concept.
(. In case of 1tate :rading !orporation of India Ktd.
v. :he !ommercial :ax Dfficer and others' reported
in )I# (*F5 1upreme !ourt (@((' nine Nudge &ench
of the 1upreme !ourt considered the +uestion
whether a company can be considered a citiOen and
be permitted to approach 1upreme !ourt under
)rticle 5$ of the !onstitution of India for asserting
its fundamental right under )rticle (*6(. of the
!onstitution. &y majority judgement it was held that
company being a juristic person is different from a
citiOen. Bidayatullah' N in his concurring but
separate judgement made following observations
on the +uestion of effect of incorporation of a
company-
Page 79 of 162
$*. ,e are dealing here with an incorporated
company. :he nature of the personality of an
incorporated company which arises from a
fiction of law' must be clearly under stood
before we proceed to determine whether the
word 4citiOen4 used in the !onstitution
generally or in )rticle (* specially' covers an
incorporated company. Jnlike an
unincorporated company' which has no
separate existence and which the law does not
distinguish from its members an incorporated
company has a separate existence and the
law recognises it as a legal person separate
and distinct from its members. :his new legal
personality emerges from the moment of
incorporation and from that date the persons
subscribing to the memorandum of association
and other persons Noining as members are
regarded as a body corporate or a corporation
aggregate and the new person begins to
function as an entity. &ut the members who
form the incorporated company do not pool
their status or their personality. If all of them
are citiOens of India the company does not
become a citiOen of India any more than if all
are married the company would be a married
person. :he personality of the members has
little to do with the persona of the
incorporated company. :he persona that
comes into being is not the aggregate of the
personae either in law or in metaphor. :he
corporation really has no physical existence 0
it is a mere 4abstraction of law4 as Kord
1elborne described it in 8. 7. #ly. !o. v.
:urner6(@E$. @ !h ) (C* at p.(%$ or as Kord
2acnaghten said in the well-known case of
1alomon v. 1alomon Q !o.ltd. (@*E )! $$ at
page .%(. it is ;at law a different person
altogether from the subscribers to the
memorandum of association.; :his distinction
is brought home if one remembers that a
company cannot commit crimes like perjury'
bigamy or capital murder4. :his persona dicta
being a creature of a fiction' is protected by
natural limitations as pointed out by almer in
his !ompany Kaw 6$9th edn.. p. (59 and which
Page 80 of 162
were tersely summed up by counsel in #. v.
!ity of Kondon' 6(F5$. @ 1" :r. (9@E at p.((5@
when he asked ;!an you hang its common
sealL;. It is true that sometimes the law
permits the corporate veil to be lifted' but of
that later.
In the later portion of the judgement' learned Nudge
dealt with the +uestion of lifting of corporate veil in
that case' for benefit of the company and observed
as under -
F%. :he next +uestion is whether the 1tate
:rading !orporation is a department or organ
of 8overnment notwithstanding the formality
of incorporation. Dn behalf of the !orporation
it is contended that if the corporate veil is
pierced one sees that the right to invoke )rt.
(*6(.6f. and 6g. is being claimed by three
persons who are admittedly citiOens of India
namely the resident of India and the two
secretaries. :he contention on the other side
is that the corporate veil cannot be pierced at
all and that if it is' then behind that veil there
is the 8overnment of India.
In my judgment it is not possible to pierce the veil
of incorporation in our country to determine the
citiOenship of the members and then to give the
corporation the benefit of )rt. (*. If we did pierce
the veil and saw that the corporation was identical
with 8overnment there would be difficulty in giving'
relief unless we held that the 1tate can be its own
citiOen. <or is it possible to raise an irrebuttable
presumption about the citiOenship of the members.
I have given detailed reasons already in answer to
the first +uestion posed for our decision. If we go by
the corporate entity then we must hold that )rt. (*
applies to natural persons. Dn that subject I have
said a great deal but what I have said sums up to
the following passage from /ucat v. !hicago'
6(@F@. C@ Ill (E$ +uoted by Farnsworth 6op. cit.. at
p. 5(9 and approved by the Jnited 1tates 1upreme
Page 81 of 162
!ourt -
;:he term citiOen can be correctly understood
in no other sense than that in which it was
understood in common acceptation when the
!onstitution was adopted' and as it is
universally explained by writers on
government' without exception. ) citiOen is of
the genus homo' inhabiting' and having
certain rights in some 1tate or district........
these privileges attach to him in every 1tate
into which he may enter' as to a human being-
as a person with faculties to appreciate them'
and enjoy them' and not to an intangibility' a
mere legal entity' an invisible artificial being'
but to a man' made in 8od4s image.....
....From the above judicial pronouncements' it can be
seen that concept of lifting or piercing the corporate veil
as some times referred to as cracking the corporate shell'
is applied by !ourts sparingly and cautiously. It is
however' recognised that boundaries of such principle
have not yet been defined and areas where such
principle may have to be applied may expand.
Principally" t!e concept of corporate body being an
independent entity en8oying e2istence
independent of its directors" is a well known
principle. ,ts assets are distinct and separate and
distinct from t!ose of its members. ,ts creditors
cannot obtain satisfaction from t!e assets of its
members. Bowever' with ever developing world and
expanding economic complexities' the !ourts have
refused to limit the scope and parameters or areas where
corporate veil may have to be lifted.
Bowsoever cautiously' the concept of piercing of
corporate veil is applied by the !ourts in various
situations. :wo situations where such principle is
consistently applied are' one where the statute itself so
permits or provides for and second where due to glaring
facts established on record it is found that a complex
web has been created only with a view to defraud the
revenue interest of the 1tate. If it is found that
Page 82 of 162
incorporation of an entity is only to create a smoke
screen to defraud the revenue and shield the individuals
who behind the corporate veil are the real operators of
the company and beneficiaries of the fraud' the !ourts
have not hesitated in ignoring the corporate status and
striking at the real beneficiaries of such complex design.
1ection (E* of the )ct itself is a statutory creation of
piercing of corporate veil. Drdinarily' directors of a
company even that of a private company would not be
answerable for the tax dues of the company. Jnder sub-
section6(. of section (E* of the )ct' however' subject to
satisfaction of certain conditions' the directors can be
held jointly and severally liable to pay the dues of the
company.
67mphasis supplied.
$n $n re 7ational 0an1 of Wales% Ltd.% 91=&&:2 #h 42&% it
was held that% E* director who is acting honestly himself is
entitled to trust the officers of the company not to conceal
from him what they ought to report to him% if he has no
reasonable ground for suspecting that they are decei!ing him.F
6irectors are not liable for all their mista1es but only for
negligence which is in a business sense culpable or gross. 7or
is a director liable for untrue representations made to the
share8holders if he honestly belie!ed the representations to be
true and had at the time reasonable grounds for his belief.
$n 6o!ey !. #ory% 91&(1: *# ;;% the Aouse of Lords had
before it a case in which +r.#ory% a director of the company%
was being made liable for misfeasance on the ground that he
was guilty of neglect of duties. 6ealing with the charge of
neglect Lord Aalsbury obser!ed ,
Page 83 of 162
;:he charge of neglect appears to rest on the assertion
that 2r.!ory' like the other directors' did not attend to
any details of business not brought before them by the
general manager or the chairman' and the argument
raises a serious +uestion as to the responsibility of all
persons holding positions like that of directors' how far
they are called upon to distrust and be on their guard
against the possibility of fraud being committed by their
subordinates of every degree. It is obvious if there is such
a duty it must render anything like an intelligent
devolution of labour impossible. ,as 2r. !ory to turn
himself into an auditor' a managing director' a chairman'
and find out whether auditors' managing directors' and
chairman were all alike deceiving himL :hat the letters of
the auditors were kept from him is clear. :hat he was
assured that provision had been made for bad debts' and
that he believed such assurances' is involved in the
admission that he was guilty of no moral fraud0 so that it
comes to this' that he ought to have discovered a
network of conspiracy and fraud by which he was
surrounded' and found out that his own brother and the
managing director 6who have since been made criminally
responsible for frauds connected with their respective
offices. were inducing him to make representations as to
the prospects of the concern and the dividends properly
payable which have turned out to be improper and false.
I cannot think that it can be expected of a director that
he should be watching either the inferior officers of the
bank or verifying the calculations of the auditors himself.
:he business of life could not go on if people could not
trust those who are put into a position of trust for the
express purpose of attending to details of management;.
$n $n re #ity @"uitable <ire $nsurance #o. Ltd.% 91&2':1 #h
(;% di!idend had been paid out of capital and losses had been
occasioned by unjustified in!estments and loans. The
li"uidator sought to ma1e the directors responsible for the loss
on the ground that they had been guilty of breach of duty and
their act on that account amounted to misfeasance. The fi!e
principles which Romer% /. laid down in connection with the
Page 84 of 162
duty of directors were ,
91: * director is only liable for gross or culpable
negligence% this means that he does not owe a duty to his
company% to ta1e all possible care. $t is some degree of
care less than that. The care that he is bound to ta1e has
been described by 7e!ille% /. in the case referred to abo!e
as Lreasonable careL to be measured by the care an
ordinary man might be eDpected to ta1e in the
circumstances on his own behalf.
92: * director need not eDhibit in the performance of his
duties a greater degree of s1ill than may reasonably be
eDpected from a person of his 1nowledge and eDperience.
93: * director is not bound to gi!e continuous attention to
the affairs of his company. Ais duties are of an
intermittent nature to be performed at periodical board
meetings% and at meetings of any committee of the board
upon which he happens to be placed. Ae is not% howe!er%
bound to attend all such meetings% though he ought to
attend whene!er% in the circumstances% he is reasonably
able to do so.
9: $n respect of all duties that% ha!ing regard to the
eDigencies of business% and the articles of association%
may properly be left to some other official% a director is%
in the absence of grounds for suspicion% justified in
trusting that official to perform such duties honestly.
9': 6irectors are not bound to eDamine entries in the
company2s boo1s.
Page 85 of 162
The principles laid down in the abo!e mentioned cases
ha!e been followed by $ndian #ourts also. Reference may be
made by way of eDample to three cases% which will be found
reported in -.#. +itra !. 7awab *li Ghan% *$R 1&24 )udh 1'3%
7ational 0an1 of Ipper $ndia% Luc1now !. 6ina 7ath -apru% *$R
1&24 )udh 23 and Thinnappa #hettiar !. Rajagopalan% *$R
1& +ad '34.
$n our opinion% a director of a company other than the
promoter or a direct borrower of the loan from the ban1 and
could also be a director who has a limited role to play and not
directly or indirectly responsible for the company going in a
debt cannot be restrained% if he himself on his own% wants to
start a business or a new !enture% from approaching a ban1 for
financial assistance. *part from a social stigma% it is a direct
infringement on the right of such a director to carry on trade or
business under *rticle 1&91:9g: of the #onstitution of $ndia.
This pro!ision in the circular shatters the concept of the
identity of a company different and distinct from its directors
without pro!iding any safeguards. $t does not distinguish
between a director who is in!ol!ed in the day8to8day
functioning of a company as against those who are not. The
circular paints all directors with the same brush.
Therefore% we ha!e reached to a conclusion that the
+aster #ircular% so far as it is sought to be made applicable to
all the directors of the company is arbitrary and unreasonable.
Page 86 of 162
We% at the cost of repetition% state that we are not "uestioning
the power of the Reser!e 0an1 of $ndia to issue the +aster
#ircular or e!en the policy decision regarding the same% but we
are only concerned with the unreasonable restriction imposed
on all the directors of the company. We find an element of
arbitrariness in such policy decision. To this limited eDtent% we
hold that the +aster #ircular is !iolati!e of *rticle 1&91:9g: of
the #onstitution of $ndia and deser!es to be struc1 down
partially.
LE5ALIT2 AND 4ALIDIT2 O3 THE NOTICE '
-ince we ha!e dealt with all the submissions regarding
the constitutional !alidity of the +aster #ircular% we shall now
loo1 into the legality and !alidity of the notice issued by the
ban1 so far as the proposed action of declaring the petitioners
as willful defaulters is concerned.
-o far as the petitioners of -pecial #i!il *pplication
7o.4' of 2(1 are concerned% they were ser!ed with a notice
dated 1&th <ebruary 2(13% indicating that they had been
a!ailing the facilities from the branch office of the ban1 at
*hmedabad% the details ha!e been stated in the notice. $t has
been further stated that their accounts were classified as
E7P*F on 3(th /une 2(12 with the outstanding balance of
Rs.1(%2;%23%(;4M((. They were informed that the ban1 had
already ta1en the -*R<*@-$ action and filed ).*. 7o.2(( of
2(12 for reco!ery of Rs.1(.=( crore in 6.R.T.8$% *hmedabad. $t
is further stated that the ban1 proposed to classify them as a
willful defaulters for the reasons stated in the notice% mainly
Page 87 of 162
default in meeting its payment>repayment obligation and
siphoning of the funds by utili?ing the same for other purpose
rather than for the purpose for which the loan was obtained.
)nce again% a second show-cause notice dated 1th +ay 2(13
was issued% calling upon the petitioners to show-cause as to
why they should not be classified as Ewillful defaultersF. The
final notice is dated =th /anuary 2(1% wherein it has been
stated that the petitioners should appear personally before the
5rie!ances Redressal #ommittee on 1;th /anuary 2(1 for
personal hearing in the matter.
*ccording to +r.-hah% the learned ad!ocate appearing on
behalf of the petitioners% the impugned show-cause notice fails
to disclose any material against the petitioners. The notice also
fails to gi!e clear fifteen days2 time by way of an opportunity to
meet with the same as stipulated in clause 39iii: of the #ircular.
We ha!e perused the show-cause notices on record. We
may only say that eDcept stating that the accounts ha!e been
classified as E7P*F and that the unit has defaulted in meeting
with its payment>repayment obligation to the ban1% no other
materials ha!e been disclosed with a !iew to gi!e an
opportunity to the petitioners to meet with the show-cause
notice.
The show-cause notice is absolutely !ague and contains
no factual or other materials. We fail to understand on what
basis the ban1 has alleged in the show-cause notice that the
funds pro!ided by the ban1 ha!e been siphoned of and the
Page 88 of 162
same were used for the purpose other than the project for
which the loan was sanctioned. $f such are the nature of the
allegations% then at least it is eDpected of the ban1 to pro!ide
some materials so that the petitioners can meet with the
same. $t has to be held that there is !iolation of the principles
of natural justice. )ne of the facets of the principles of natural
justice is fairness which% we do not find on the part of the ban1
in the proposed action.
We ha!e noticed one thing that mere failure on the part
of the borrower to repay the amount of loan by itself does not
entail the liability of being termed as a Ewillful defaultF and
thereby Ewillful defaultersF. EWillful defaultF broadly co!ers the
following ,
9a: 6eliberate non8payment of the dues despite ade"uate
cash flow and good networthH
9b: -iphoning off of funds to the detriment of the
defaulting unitH
9c: *ssets financed either not been purchased or been
sold and proceeds ha!e been misutilisedH
9d: +isrepresentation>falsification of recordsH
9e: 6isposal>remo!al of securities without ban12s
1nowledgeH
9f: <raudulent transactions by the borrower.
The show-cause notice is absolutely silent regarding the
Page 89 of 162
same. $t could be the case of the ban1 that there has been a
deliberate non8payment of the dues despite ade"uate cash8
flow and good net8worth but% before alleging% there has to be
some material with the ban1 and the same should be prima
facie disclosed to the borrower so that he could ma1e good his
case that there has been no deliberate non8payment of the
dues. <or eDample% if it is the case of the ban1 that there is
ade"uate cash8flow and good net8worth and despite that the
borrower has failed in repayment of the loan% then the ban1
should disclose the source of information regarding the
ade"uate cash8flow and good net8worth.
We are not satisfied with the manner in which the ban1
wants to proceed against the petitioners. The ban1 can
definitely proceed in accordance with the policy decision as
reflected from the +aster #ircular% but the same has to be in
accordance with law.
We are of the !iew that since the show-cause notice is
bereft of basic details and material particulars% the same
deser!es to be "uashed and set-aside. $t would be open for the
ban1 to once again issue a fresh show-cause notice
incorporating the necessary materials and details on the basis
of which it wants to ma1e good its allegations that the
petitioners are willful defaulters within the meaning of the
same as eDplained in the +aster #ircular.
The same is the problem so far as the show-cause notice
issued to the petitioners of -pecial #i!il *pplication 7o.1(12(
Page 90 of 162
of 2(1 is concerned. Aowe!er% the "uestion is% whether we
can loo1 into the same and issue an appropriate writ% order or
direction to a -tandard #hartered 0an1 which% although is a
scheduled ban1 figuring in a -econd -chedule to the Reser!e
0an1 of $ndia *ct% 1&3% yet is a pri!ate ban1. -uch being the
position% whether the -tandard #hartered 0an1 would be
amenable to the writ jurisdiction of this #ourt under *rticle 224
of the #onstitution of $ndia% is a "uestion which we need to
consider.
$n the case of *jay Aasia !. Ghalid +ujib% *$R 1&=1 -#
=;% the -upreme #ourt laid down certain rele!ant tests for
determining whether a company>society>corporation can be
held to be an agency or instrumentality of the -tate
5o!ernment. These tests are as under ,88
6(. Dne thing is clear that if the entire share capital of
the corporation is held by 8ovt. it would go a long way
towards indicating that the corporation is an
instrumentality or agency of 8overnment.
6$. ,here the financial assistance of the 1tate is so much
as to meet almost entire expenditure of the corporation'
it would afford 1ome indication of the corporation being
impregnated with governmental character.
65. It may also be a relevant factor .... whether the
corporation enjoys monopoly status which is the 1tate
conferred or 1tate protected.
6C. 7xistence of 4deep and pervasive 1tate control may
afford an indication that the !orporation is a 1tate
)gency or instrumentality.
Page 91 of 162
6%. If the functions of the corporation of ublic
importance and closely related to governmental
functions it would be a relevant factor in classifying the
corporation as an instrumentality or agency of 8ovt.
6F. 1pecifically' if a department of 8ovt. is transferred to
a corporation' it would be a strong factor supportive of
this inference of the !orporation being an instrumentality
or agency of 8overnment.
Proceeding further% the -upreme #ourt held that it was
immaterial whether the corporation was created by a statute
or under a state. The test is whether it is an instrumentality or
agency of the 5o!ernment and not as to how it was created. $n
the said case their Lordships proceeded to obser!e that the
5o!ernment may act through the instrumentality or agency of
a natural person or it may employ the instrumentality or
agency of juridical person to carry out its functions. The test is
that it will be considered to be an agency and instrumentality
of the -tate. $t is true that the corporation is a distinct juristic
entity with a corporate structure of its own and it carries on its
functions on business principles with a certain amount of
autonomy which is necessary as well as useful from the point
of !iew of effecti!e business management but behind the
formal ownership which is cast in the corporate mould% the
reality is !ery much the deeply per!asi!e presence of the
5o!ernment% and it is in fact the 5o!ernment which acts
through the instrumentality or. agency of the corporation or
the juristic person. $f the instrumentality and agency of the
5o!t. discharges the 5o!ernmental functions it must be
subject to same limitations in the field of constitutional law as
the 5o!ernment itself% though in the eye of the law it would be
a distinct and independent legal entity. $n *jay Aasia2s case
Page 92 of 162
9supra:% the -upreme #ourt was considering the obligations of
instrumentalities and agencies of the 5o!ernment to respect
the fundamental rights of the citi?ens and they were held to be
bound to enforce the fundamental rights guaranteed to the
citi?ens of $ndia under Part $$$ of the #onstitution of $ndia. $f this
binding was not there% the fundamental rights in the opinion of
the -upreme #ourt would then be reduced to an idle dream or
a promise of unreality. 0ecause in the constitution philosophy
of a democratic socialist public 5o!t. has to underta1e a
multitude of socio8economic operations and the 5o!t. ha!ing
regard to the practical ad!antages of functioning through the
legal de!ice of a corporation by resorting to create
instrumentalities or agencies which will not eDonerate the
5o!t. itself from obeying the fundamental rights of the citi?ens.
$n the conteDt of enforcing fundamental rights% the -upreme
#ourt laid emphasis that by process of judicial construction
fundamental rights cannot be rendered futile and meaningless.
0ecause in the opinion of the *peD #ourt% it is the fundamental
rights which alone with the directi!e principles constitute the
life force of the #onstitution of $ndia and they must be put into
effecti!e action by meaningful and purposeful interpretation.
Therefore% it was obser!ed that if a corporation or a company
is the instrumentality or agency of 5o!ernment% it must be
held to be an authority within the meaning of *rticle 12 of the
#onstitution and subject to the same basic obligation to obey
the fundamental rights as the 5o!ernment.
*pplying the test nos.1 and 2 to the facts of the case on
hand% no materials ha!e been placed on record to e!en
remotely indicate that the share capital of the ban1 is held by
Page 93 of 162
the #entral 5o!ernment or the -tate 5o!ernment% or the ban1
is dependent upon the 5o!ernment for financial assistance.
There is nothing to e!en remotely suggest that the -tandard
#hartered 0an1 enjoys any monopoly status conferred by the
-tate. With regard to the fourth test% there is nothing to
indicate eDistence of Edeep and per!asi!e -tate controlF. *ll
that can be said is that the directi!es of the Reser!e 0an1 of
$ndia are binding on the ban1. With regard to the fifth test%
although it has been !ery !ociferously submitted by +r.-helat%
the learned appearing on behalf of the petitioners% that the
functions of the ban1 are of public importance and further the
ban1 could be said to be discharging a public function which is
a1in to a 5o!ernmental function% yet this argument pales into
insignificance in !iew of the decision of the -upreme #ourt in
the case of <ederal 0an1 Limited !. -agar Thomas and others%
92((3:1( -## ;33. We shall discuss the decision of the
-upreme #ourt in the case of <ederal 0an1 Limited 6supra: a
little later.
While dealing with the test based on functions of the
#oirporation of public importance% the -upreme #ourt in
Ramana 6ayaram -hetty2s case% *$R 1&;& -# 142=% referred
Eto @.-.@!ans !. #harles @.7ewton% 91&44:3=2 I- 2&4 and
-mith !. *llwright% 91&3:32 I- 4&% and obser!ed that the
decisions show that the test of public or go!ernmental
character of the function is not easy of application and does
not in!ariably lead to the correct inference because the range
of go!ernmental acti!ity is broad and !aried and merely
because an acti!ity may be such as may legitimately be
carried on by 5o!ernment% it does not mean that a #orporation
Page 94 of 162
which is otherwise a pri!ate entity% would be an
instrumentality or agency of the 5o!ernment by reason of
carrying of such acti!ity. $n applying the test% therefore% a
further precaution is to be ta1en and it is to be seen whether
the public nature of the function is impregnated with
go!ernmental character or Etied or entwined with
5o!ernmentF or fortified by some other additional factor 9vide
obser!ations in para 1= column 2 at page 41:. $n our !iew%
therefore% the fifth test is also not satisfied.
Thus% so far as the tests laid down by the -upreme #ourt
in the case of *jay Aasia 9supra: is concerned% none of the
tests could be said to be fulfilled so as to ma1e the -tandard
#hartered 0an1% a pri!ate ban1% amenable to the writ
jurisdiction of this #ourt.
$n Pradeep Gumar 0iswas !. $ndian $nstitute of #hemical
0iology and others% 92((2:' -## 111% the -upreme #ourt
considered the issue as regards *rticle 12 of the #onstitution
of $ndia at length. We "uote the following obser!ations of the
-upreme #ourt ,
,hat is 4)uthority4 and when includible in 4other
authorities4' re- )rticle ($
,e have' in the earlier part of this judgment' referred to
the dictionary meaning of 4authority4' often used as
plural' as in )rticle ($ viO. 4other authorities4. <ow is the
time to find out the meaning to be assigned to the term
as used in )rticle ($ of the !onstitution.
Page 95 of 162
) reference to )rticle (56$. of the !onstitution is
apposite. It provides--
;(56$.. :he 1tate shall not make any law which
takes away or abridges the right conferred by this
part and any law made in contravention of this
clause shall' to the extent of the contravention' be
void.;
!lause 65. of )rticle (5 defines 4law4 as including any
Drdinance' order' bye-law' rule' regulation' notification'
custom or uses having in the territory of India the force of
law. ,e have also referred to the speech of /r. &.#.
)mbedkar in !onstituent )ssembly explaining the
purpose sought to be achieved by )rticle ($. In #17&4s
case' the majority adopted the test that a statutory
authority ;would be within the meaning of 4other
authorities4 if it has been invested with statutory power
to issue binding directions to the parties' disobedience of
which would entail penal conse+uences or it has the
sovereign power to make rules and regulations having
the force of law;.
In 1ukhdev 1ingh4s case' the principal reason which
prevailed with ).<. #ay' !N for holding D<8!' KI! and IF!
as authorities and hence 4the 1tate4 was that rules and
regulations framed by them have the force of law. In
1ukhdev 1ingh4s case' 2athew N. held that the test laid
down in #17&4s case was satisfied so far as D<8! is
concerned but the same was not satisfied in the case of
KI! and IF! and' therefore' he added to the list of tests
laid down in #17&4s case' by observing that though there
are no statutory provisions' so far as KI! and IF! are
concerned' for issuing binding directions to third parties'
the disobedience of which would entail penal
conse+uences' yet these corporations 6i. set up under
statutes' 6ii. to carry on business of public importance or
which is fundamental to the life of the people RRR can be
considered as the 1tate within the meaning of )rticle ($.
:hus' it is the functional test which was devised and
utiliOed by 2athew N. and there he said'
;the +uestion for consideration is whether a public
Page 96 of 162
corporation set up under a special statute to carry
on a business or service which arliament thinks
necessary to be carried on in the interest of the
nation is an agency or instrumentality of the 1tate
and would be subject to the limitations expressed in
)rticle (56$. of the !onstitution. :he 1tate is an
abstract entity. It can only act through the
instrumentality or agency of natural or juridicial
persons. :herefore' there is nothing strange in the
notion of the 1tate acting through a corporation and
making it an agency or instrumentality of the
1tate;.
It is pertinent to note that functional tests became
necessary because of the 1tate having chosen to entrust
its own functions to an instrumentality or agency in
absence whereof that function would have been a 1tate
activity on account of its public importance and being
fundamental to the life of the people.
:he philosophy underlying the expansion of )rticle ($ of
the !onstitution so as to embrace within its ken such
entitites which would not otherwise be the 1tate within
the meaning of )rticle ($ of the !onstitution has been
pointed out by the eminent jurist B.2. 1eervai in
!onstitutional Kaw of India 61ilver Nubilee 7dition' "ol.(..
;:he !onstitution should be so interpreted that the
governing power' wherever located' must be
subjected to fundamental constitutional
limitations............ Jnder )rticle (56$. it is 1tate
action of a particular kind that is prohibited.
Individual invasion of individual rights is not'
generally speaking' covered by )rticle (56$.. For'
although )rticles (E' $5 and $C show that
fundamental rights can be violated by private
individuals and relief against them would be
available under )rticle 5$' still' by and large' )rticle
(56$. is directed against 1tate action. ) public
corporation being the creation of the 1tate' is
subject to the same constitutional limitations as the
1tate itself. :wo conditions are necessary' namely'
that the !orporation must be created by the 1tate
Page 97 of 162
and it must invade the constitutional rights of
individuals;6ara E.%C.. ;:he line of reasoning
developed by 2athew N. prevents a large-scale
evasion of fundamental rights by transferring work
done in 8ovt. /epartments to statutory
!orporations' whilst retaining 8ovt. control.
!ompany legislation in India permits tearing of the
corporate veil in certain cases and to look behind
the real legal personality. &ut 2athew N. achieved
the same result by a different route' namely' by
drawing out the implications of )rticle (56$.; 6ara
E.%E ibid..
:he terms instrumentality or agency of the 1tate are not
to be found mentioned in )rticle ($ of the !onstitution.
$evert!eless t!ey fall wit!in t!e ken of Article 12
of t!e -onstit/tion for t!e simple reason t!at if t!e
.tate c!ooses to set /p an instr/mentality or
agency and entr/sts it wit! t!e same power"
f/nction or action w!ic! wo/ld ot!erwise !ave
been e2ercised or /ndertaken by itself" t!ere is no
reason w!y s/c! instr/mentality or agency s!o/ld
not be s/b8ect to same constit/tional and p/blic
law limitations as t!e .tate wo/ld !ave been. In
different judicial pronouncements' some of which we
have reviewed' any company' corporation' society or any
other entity having a juridical existence if it has been
held to be an instrumentality or agency of the 1tate' it
has been so held only on having found to be an alter ego'
a double or a proxy or a limb or an off-spring or a mini-
incarnation or a vicarious creature or a surrogate and so
on RR by whatever name called RR of the 1tate. In short'
the material available must justify holding of the entity
wearing a mask or a veil worn only legally and outwardly
which on piercing fails to obliterate the true character of
the 1tate in disguise. :hen it is an instrumentality or
agency of the 1tate.
It is this basic and essential distinction between an
4instrumentality or agency4 of the 1tate and 4other
authorities4 which has to be borne in mind. )n authority
must be an authority sui juris to fall within the meaning
of the expression 4other authorities4 under )rticle ($. )
juridical entity' though an authority' may also satisfy the
Page 98 of 162
test of being an instrumentality or agency of the 1tate in
which event such authority may be held to be an
instrumentality or agency of the 1tate but not the vice
versa.
,e sum up our conclusions as under--
6(. 1imply by holding a legal entity to be an
instrumentality or agency of the 1tate it does not
necessarily become an authority within the meaning of
4other authorities4 in )rticle ($. :o be an authority' the
entity should have been created by a statute or under a
statute and functioning with liability and obligations to
public. Further' the statute creating the entity should
have vested that entity with power to make law or issue
binding directions amounting to law within the meaning
of )rticle (56$. governing its relationship with other
people or the affairs of other people RR their rights'
duties' liabilities or other legal relations. If created under
a statute' then there must exist some other statute
conferring on the entity such powers. ,n eit!er case" it
s!o/ld !ave been entr/sted wit! s/c! f/nctions as
are governmental or closely associated t!erewit!
by being of p/blic importance or being
f/ndamental to t!e life of t!e people and !ence
governmental. ./c! a/t!ority wo/ld be t!e .tate"
for" one w!o en8oys t!e powers or privileges of t!e
.tate m/st also be s/b8ected to limitations and
obligations of t!e .tate. ,t is t!is strong stat/tory
flavo/r and clear indicia of power 99 constit/tional
or stat/tory" and its potential or capability to act
to t!e detriment of f/ndamental rig!ts of t!e
people" w!ic! makes it an a/t!ority: t!o/g! in a
given case" depending on t!e facts and
circ/mstances" an a/t!ority may also be fo/nd to
be an instr/mentality or agency of t!e .tate and
to t!at e2tent t!ey may overlap. :ests (' $ and C in
)jay Basia enable determination of 8overnmental
ownership or control. :ests 5' % and F are 4functional4
tests. :he propounder of the tests himself has used the
words suggesting relevancy of those tests for finding out
if an entity was instrumentality or agency of the 1tate.
Jnfortunately thereafter the tests were considered
relevant for testing if an authority is the 1tate and this
Page 99 of 162
fallacy has occurred because of difference between
4instrumentality and agency4 of the 1tate and an
4authority4 having been lost sight of sub-silentio'
unconsciously and un-deliberated. In our opinion' and
keeping in view the meaning which 4authority4 carries'
the +uestion whether an entity is an 4authority4 cannot be
answered by applying )jay Basia tests.
6$. :he tests laid down in )jay Basia4s case are relevant
for the purpose of determining whether an entity is an
instrumentality or agency of the 1tate. <either all the
tests are re+uired to be answered in positive nor a
positive answer to one or two tests would suffice. It will
depend upon a combination of one or more of the
relevant factors depending upon the essentiality and
overwhelming nature of such factors in identifying the
real source of governing power' if need be by removing
the mask or piercing the veil disguising the entity
concerned. ,hen an entity has an independent legal
existence' before it is held to be the 1tate' the person
alleging it to be so must satisfy the !ourt of brooding
presence of government or deep and pervasive control of
the government so as to hold it to be an instrumentality
or agency of the 1tate.
67mphasis supplied.
$n /atyapal -ingh and others !. Inion of $ndia and others%
92(13:4 -## '2% the -upreme #ourt reiterated the tests for
considering% whether a body falls within the definition of -tate
under *rticle 12 of the #onstitution of $ndia.
The tests propounded for determining as to when the
#orporation will be said to be an instrumentality or agency of
the 5o!ernment as stated in Ramana 6ayaram -hetty !.
$nternational *irport *uthority of $ndia% 91&;&:3 -## =&% were
summari?ed as follows ,
Page 100 of 162
6(. Dne thing is clear that if the entire share capital of
the corporation is held by 8overnment' it would go a long
way towards indicating that the corporation is an
6$. ,here the financial assistance of the 1tate is so much
as to meet almost entire expenditure of the corporation'
it would afford some indication of the corporation being
impregnated with governmental character.
65. It may also be a relevant factor STU whether the
corporation enjoys monopoly status which is 1tate-
conferred or 1tate-protected.
6C. 7xistence of deep and pervasive 1tate control may
afford an indication that the corporation is a 1tate agency
or instrumentality.
6%. If the functions of the corporation are of public
importance and closely related to governmental
functions' it would be a relevant factor in classifying the
corporation as an instrumentality or agency of
8overnment.
6F. 1pecifically' if a department of 8overnment is
transferred to a corporation' it would be a strong factor
supportive of this inference of the corporation being an
The aforesaid ratio in Ramana 6ayaram -hetty 9supra:
has been consistently followed by the -upreme #ourt% as is
e!ident from paragraph 31 of the judgment in 0iswas 9supra:.
Para 31 reads as under ,
5(. :he tests to determine whether a body falls within
the definition of 41tate4 in )rticle ($ laid down in #amana
with the !onstitution &ench imprimatur in )jay Basia
form the keystone of the subse+uent jurisprudential
Page 101 of 162
superstructure judicially crafted on the subject which is
apparent from a chronological consideration of the
authorities cited.
The subse"uent paragraphs of the judgment noticed the
efforts made to further define the contours within which to
determine% whether a particular entity falls within the definition
of other authority% as gi!en in *rticle 12. The ultimate
conclusion of the #onstitution 0ench are recorded in paragraph
3& and ( as under ,8
5*. Fresh off the judicial anvil is the decision in 2ysore
aper 2ills Ktd. v. 2ysore aper 2ills Dfficers4 )ssn.'
6$99$.$ 1!! (FE' which fairly represents what we have
seen as a continuity of thought commencing from the
decision in #ajasthan 7lectricity &oard in (*FE up to the
present time. It held that a company substantially
financed and financially controlled by the 8overnment'
managed by a &oard of /irectors nominated and
removable at the instance of the 8overnment and
carrying on important functions of public interest under
the control of the 8overnment is 4an authority4 within the
meaning of )rticle ($.
(. :he picture that ultimately emerges is that the tests
formulated in )jay Basia are not a rigid set of principles
so that if a body falls within any one of them it must' ex
hypothesi' be considered to be a 1tate within the
meaning of )rticle ($. :he +uestion in each case would
be' whether in the light of the cumulative facts as
established' the body is financially' functionally and
administratively dominated by or under the control of the
8overnment. 1uch control must be particular to the body
in +uestion and must be pervasive. If this is found then
the body is a 1tate within )rticle ($. Dn the other hand'
when the control is merely regulatory whether under
statute or otherwise' it would not serve to make the body
a 1tate.
Page 102 of 162
$n our opinion% the functions of the -tandard #hartered
0an1 as one of the -cheduled 0an1s under the Reser!e 0an1
of $ndia *ct% 1&3% cannot be regarded as 5o!ernmental or of
essential public importance or as closely related to
5o!ernmental functions or being fundamental to the life of the
people and duties and obligations to the public at large. The
ban1 has its own resources to raise its funds without any
contribution or shareholding by the -tate. $t is not in dispute
that it has its own 0oard of 6irectors. $t wor1s li1e any other
pri!ate company in the ban1ing business.
$n the aforesaid conteDt% it will be profitable for us to loo1
into a decision of the -upreme #ourt in the case of <ederal
0an1 Limited !. -agar Thomas and others% 92((3:1( -## ;33.
$n the said case% the respondent no.1 was wor1ing as a 0ranch
+anager in the <ederal 0an1. Ae was suspended on 2&th +ay
1&=2 since a disciplinary in"uiry was ordered into some
charges of misconduct. The $n"uiry )fficer found him guilty of
the charges and ultimately awarded punishment of dismissal.
The respondent no.1 challenged his dismissal by filing a writ
petition in the Aigh #ourt. * preliminary objection to the
maintainability of the writ petition was ta1en by the appellant
0an1% saying that it was a pri!ate ban1 and not a -tate or its
agency or instrumentality within the meaning of *rticle 12 of
the #onstitution of $ndia. The learned -ingle /udge of the Aigh
#ourt% howe!er% found that the <ederal 0an1 performed a
public duty% and as such% it would get co!ered under the
definition of 2other authority2 within the meaning of *rticle 12%
and as such% the writ petition was maintainable. The order
passed by the learned -ingle /udge was carried in appeal and
Page 103 of 162
the appeal was also dismissed. The <ederal 0an1 challenged
the order passed by the Aigh #ourt% dismissing the appeal%
before the -upreme #ourt. The "uestion which fell for the
consideration before the -upreme #ourt on appeal was%
whether the appellant 0an1 was a pri!ate body or fell within
the definition of a -tate or legal or other authorities under the
control of the 5o!ernment within the meaning of *rticle 12 of
the #onstitution of $ndia.
The obser!ations of the -upreme #ourt as contained in
paragraphs 24 to 33 are worth noting ,
$F. ) company registered under the !ompanies )ct for
the purposes of carrying on any trade or business is a
private enterprise to earn livelihood and to make profits
out of such activities. &anking is also a kind of profession
and a commercial activity' the primary motive behind it
can well be said to earn returns and profits. 1ince time
immemorial' such activities have been carried on by
individuals generally. It is a private affair of the company
though case of nationaliOed banks stands on a different
footing. :here may' well be companies' in which majority
of the share capital may be contributed out of the 1tate
funds and in that view of the matter there may be more
participation or dominant participation of the 1tate in
managing the affairs of the company. &ut in the present
case we are concerned with a banking company which
has its own resources to raise its funds without any
contribution or shareholding by the 1tate. It has its own
&oard of /irectors elected by its shareholders. It works
like any other private company in the banking business
having no monopoly status at all. )ny company carrying
on banking business with a capital of five lacs will
become a scheduled bank. )ll the same' banking activity
as a whole carried on by various banks undoubtedly has
an impact and effect on the economy of the country in
general. 2oney of the shareholders and the depositors is
with such companies' carrying on banking activity. :he
Page 104 of 162
banks finance the borrowers on any given rate of interest
at a particular time. :hey advance loans as against
securities. :herefore' it is obviously necessary to have
regulatory check over such activities in the interest of the
company itself' the shareholders' the depositors as well
as to maintain the proper financial e+uilibrium of the
national economy. :he &anking companies have not
been set up for the purposes of building economy of the
1tate on the other hand such private companies have
been voluntarily established for their own purposes and
interest but their activities are kept under check so that
their activities may not go wayward and harm the
economy in general. A private banking company wit!
all freedom t!at it !as" !as to act in a manner t!at
it may not be in conflict wit! or against t!e fiscal
policies of t!e .tate and for s/c! p/rposes"
g/idelines are provided by t!e Reserve Bank so
t!at a proper fiscal discipline" to cond/ct its affairs
in carrying on its b/siness" is maintained. .o as to
ens/re ad!erence to s/c! fiscal discipline" if need
be" at times even t!e management of t!e company
can be taken over. $onet!eless" as observed
earlier" t!ese are all reg/latory meas/res to keep
a c!eck and provide g/ideline and not a
participatory dominance or control over t!e affairs
of t!e company. For other companies in general
carrying on other business activities may be
manufacturing' other industries or any business' such
checks are provided under the provisions of the
!ompanies )ct' as indicated earlier. :here also' the main
consideration is that the company itself may not sink
because of its own mismanagement or the interest of the
shareholders or people generally may not be jeopardiOed
for that reason. &esides taking care of such interest as
indicated above' there is no other interest of the 1tate' to
control the affairs and management of the private
companies. :he care is taken in regard to the industries
covered under the Industries 6/evelopment and
#egulation. )ct' (*%( that their production which is
important for the economy may not go down yet the
business activity is carried on by such companies or
corporations which only remains a private activity of the
entrepreneurs3companies.
$E. 1uch private companies would normally not be
Page 105 of 162
amenable to the writ jurisdiction under )rticle $$F of the
!onstitution. &ut in certain circumstances a writ may
issue to such private bodies or persons as there may be
statutes which need to be complied with by all concerned
including the private companies. For example' there are
certain legislations like the Industrial /isputes )ct' the
2inimum ,ages )ct' the Factories )ct or for maintaining
proper environment say )ir 6revention and !ontrol of
ollution. )ct' (*@( or ,ater 6revention and !ontrol of
ollution. )ct' (*EC etc. or statutes of the like nature
which fasten certain duties and responsibilities statutorily
upon such private bodies which they are bound to
comply with. If they violate such a statutory provision a
writ would certainly be issued for compliance of those
provisions. For instance' if a private employer dispense
with the service of its employee in violation of the
provisions contained under the Industrial /isputes )ct' in
innumerable cases the Bigh !ourt interfered and have
issued the writ to the private bodies and the companies
in that regard. &ut the difficulty in issuing a writ may
arise where there may not be any non-compliance or
violation of any statutory provision by the private body.
In that event a writ may not be issued at all. Dther
remedies' as may be available' may have to be resorted
to.
$@. :he six factors which have been enumerated in the
case of )jay Basia 6supra. and approved in the later
decisions in the case of #amana 6supra. and the seven
Nudges &ench in the case of radeep Aumar &iswas
6supra. may be applied to the facts of the present case
and see as to those tests apply to the appellant bank or
not. )s indicated earlier' share capital of the appellant
bank is not held at all by the government nor any
financial assistance is provided by the 1tate' nothing to
say which may meet almost the entire expenditure of the
company. :he third factor is also not answered since the
appellant bank does not enjoy any monopoly status nor it
can be said to be an institution having 1tate protection.
1o far control over the affairs of the appellant bank is
concerned' they are managed by the &oard of /irectors
elected by its shareholders. <o governmental agency or
officer is connected with the affairs of the appellant bank
nor anyone of them is a member of the &oard of
/irectors. ,n t!e normal f/nctioning of t!e private
Page 106 of 162
banking company t!ere is no participation or
interference of t!e .tate or its a/t!orities. 6!e
stat/tes !ave been framed reg/lating t!e financial
and commercial activities so t!at fiscal e;/ilibri/m
may be kept maintained and not get dist/rbed by
t!e malf/nctioning of s/c! companies or
instit/tions involved in t!e b/siness of banking.
6!ese are reg/latory meas/res for t!e p/rposes of
maintaining t!e !ealt!y economic atmosp!ere in
t!e co/ntry. ./c! reg/latory meas/res are
provided for ot!er companies also as well as
ind/stries man/fact/ring goods of importance.
't!erwise t!ese are p/rely private commercial
activities. ,t deserves to be noted t!at it !ardly
makes any difference t!at s/c! s/pervisory
vigilance is kept by t!e Reserve Bank of ,ndia
/nder a .tat/te or t!e -entral <overnment. %ven if
it was wit! t!e -entral <overnment in place of t!e
Reserve Bank of ,ndia it wo/ld not !ave made any
difference" t!erefore" t!e arg/ment based on t!e
decision of All ,ndia Bank %mployees# Association
=s/pra> does not advance t!e case of t!e
respondent. It is only in case of malfunctioning of the
company that occasion to exercise such powers arises to
protect the interest of the depositors' shareholders or the
company itself or to help the company to be out of the
woods. In the times of normal functioning such occasions
do not arise except for routine inspections etc. with a
view to see that things are moved smoothly in keeping
with fiscal policies in general.
$*. :here are a number of such companies carrying on
the profession of banking. :here is nothing which can be
said to be close to the governmental functions. It is an
old profession in one form or the other carried on by
individuals or by a group of them. Kosses incurred in the
business are theirs as well as the profits. )ny business or
commercial activity' may be banking' manufacturing
units or related to any other kind of business generating
resources' employment' production and resulting in
circulation of money are no doubt' are such which do
have impact on the economy of the country in general.
&ut such activities cannot be classified one falling in the
category of discharging duties' functions of public nature.
:hus the case does not fall in the fifth category of cases
Page 107 of 162
enumerated in the case of )jay Basia 6supra.. )gain we
find that the activity which is carried on by the appellant
is not one which may have been earlier carried on by the
government and transferred to the appellant company.
For the sake of argument even if it may be assumed that
one or the other test as provided in the case of )jay
Basia 6supra. may be attracted that by itself would not
be sufficient to hold that it is an agency of the 1tate or a
company carrying on the functions of public nature. In
this connection' observations made in the case of
radeep Aumar &iswas 6supra. +uoted earlier would also
be relevant.
59. ,e may now consider the two decisions i.e. )ndi
2ukta 6supra. and the J.. 1tate !o-operative Kand
/evelopment &ank Ktd.6supra.upon which much reliance
has been placed on behalf of the respondents to show
that a writ would lie against the appellant company. 1o
far the decision in the case of J.. 1tate !o-operative
Kand /evelopment &ank Ktd.6supra. is concerned' it
stands entirely on a different footing and we have
elaborately discussed it earlier.
5(. :he other case which has been heavily relied upon is
)ndi 2ukta 6supra.. It is no doubt held that a 2andamus
can be issued to any person or authority performing
public duty' owing positive obligation to the affected
party. :he writ petition was held to be maintainable since
the teacher whose services were terminated by the
institution was affiliated to the university and was
governed by the Drdinances' casting certain obligations
which it owed to that petitioner. &ut it is not the case
here. Dur attention has been drawn by the learned
counsel for the appellant to paragraphs ($' (5 and $( of
the decision 6)ndi 2ukta. to indicate that even according
to this case no writ would lie against the private body
except where it has some obligation to discharge which is
statutory or of public character.
32. &erely beca/se t!e Reserve Bank of ,ndia
lays t!e banking policy in t!e interest of t!e
banking system or in t!e interest of monetary
stability or so/nd economic growt! !aving d/e
Page 108 of 162
regard to t!e interests of t!e depositors etc. as
provided /nder .ection 5=c>=a> of t!e Banking
Reg/lation Act does not mean t!at t!e private
companies carrying on t!e b/siness of or
commercial activity of banking" disc!arge any
p/blic f/nction or p/blic d/ty. 6!ese are all
reg/latory meas/res applicable to t!ose carrying
on commercial activity in banking and t!ese
companies are to act according to t!ese provisions
failing w!ic! certain conse;/ences follow as
indicated in t!e Act itself. rovision regarding
ac+uisition of a banking company by the 8overnment' it
may be pointed out that any private property can be
ac+uired by the 8overnment in public interest. It is now
judicially accepted norm that private interest has to give
way to the public interest. If a private property is
ac+uired in public interest it does not mean that the
party whose property is ac+uired is performing or
discharging any function or duty of public character
though it would be so for ac+uiring authority.
55. 0or t!e disc/ssion !eld above" in o/r view" a
private company carrying on banking b/siness as a
sc!ed/led bank" cannot be termed as an
instit/tion or company carrying on any stat/tory
or p/blic d/ty. A private body or a person may be
amenable to writ 8/risdiction only w!ere it may
become necessary to compel s/c! body or
association to enforce any stat/tory obligations or
s/c! obligations of p/blic nat/re casting positive
obligation /pon it. ,e don4t find such conditions are
fulfilled in respect of a private company carrying on a
commercial activity of banking. &erely reg/latory
provisions to ens/re s/c! activity carried on by
private bodies work wit!in a discipline" do not
confer any s/c! stat/s /pon t!e company nor p/ts
any s/c! obligation /pon it w!ic! may be enforced
t!ro/g! iss/e of a writ /nder Article 22? of t!e
-onstit/tion. resent is a case of disciplinary action
being taken against its employee by the appellant &ank.
#espondent4s service with the bank stands terminated.
:he action of the &ank was challenged by the respondent
by filing a writ petition under )rticle $$F of the
!onstitution of India. :he respondent is not trying to
enforce any statutory duty on the part of the &ank. :hat
Page 109 of 162
being the position' the appeal deserves to be allowed.
67mphasis supplied.
Thus% if we apply the ratio of the decision of the -upreme
#ourt in the case of <ederal 0an1 9supra:% then we ha!e no
difficulty in arri!ing at the conclusion that a writ petition would
not be maintainable at the instance of the petitioners against a
pri!ate ban1 in so far as the challenge to the legality and
!alidity of the notice is concerned.
We may "uote one more decision of the -upreme #ourt%
showing considerable law on the issue with which we are
dealing with% in the case of 0inny Limited and another !.
C.-adasi!an and others% 92((':4 -## 4';.
(9. :he ,rit of 2andamus lies to secure the
performance of a public or a statutory duty. :he
prerogative remedy of mandamus has long provided the
normal means of enforcing the performance of public
duties by public authorities. Driginally' the writ of
mandamus was merely an administrative order from the
sovereign to subordinates. In 7ngland' in early times' it
was made generally available through the !ourt of Aing4s
&ench' when the !entral 8overnment had little
administrative machinery of its own. 7arly decisions show
that there was free use of the writ for the enforcement of
public duties of all kinds' for instance against inferior
tribunals which refused to exercise their jurisdiction or
against municipal corporation which did not duly hold
elections' meetings' and so forth. In modern times' the
mandamus is used to enforce statutory duties of public
authorities. :he courts always retained the discretion to
withhold the remedy where it would not be in the interest
of justice to grant it. It is also to be noticed that the
statutory duty imposed on the public authorities may not
be of discretionary character. ) distinction had always
Page 110 of 162
been drawn between the public duties enforceable by
mandamus that are statutory and duties arising merely
from contract. !ontractual duties are enforceable as
matters of private law by ordinary contractual remedies
such as damages' injunction' specific performance and
declaration. In the )dministrative Kaw 6<inth 7dition. by
1ir ,illiam ,ade and !hristopher Forsyth' 6Dxford
Jniversity ress. at page F$(' the following opinion is
expressed-
;) distinction which needs to be clarified is that
between public duties enforceable by mandamus'
which are usually statutory' and duties arising
merely from contract. !ontractual duties are
enforceable as matters of private law by the
ordinary contractual remedies' such as damages'
injunction' specific performance and declaration.
:hey are not enforceable by mandamus' which in
the first place is confined to public duties and
secondly is not granted where there are other
ade+uate remedies. :his difference is brought out
by the relief granted in cases of ultra vires. If for
example a minister or a licensing authority acts
contrary to the principles of natural justice'
certiorari and mandamus are standard remedies.
&ut if a trade union disciplinary committee acts in
the same way' these remedies are inapplicable- the
rights of its members depend upon their contract of
membership' and are to be protected by declaration
and injunction' which accordingly are the remedies
employed in such cases.;
((. Nudicial review is designed to prevent the cases of
abuse of power and neglect of duty by public authorities.
Bowever' under our !onstitution' )rticle $$F is couched
in such a way that a writ of mandamus could be issued
even against a private authority. Bowever' such private
authority must be discharging a public function and that
the decision sought to be corrected or enforced must be
in discharge of a public function. :he role of the 1tate
expanded enormously and attempts have been made to
create various agencies to perform the governmental
functions. 1everal corporations and companies have also
been formed by the government to run industries and to
Page 111 of 162
carry on trading activities. :hese have come to be known
as ublic 1ector Jndertakings. Bowever' in the
interpretation given to )rticle ($ of the !onstitution' this
!ourt took the view that many of these companies and
corporations could come within the sweep of )rticle ($ of
the !onstitution. )t the same time' there are private
bodies also which may be discharging public functions. It
is difficult to draw a line between the public functions and
private functions when it is being discharged by a purely
private authority. ) 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. &odies therefore exercise public functions when
they intervene or participate in social or economic affairs
in the public interest. In a book on Nudicial #eview of
)dministrative )ction 6Fifth 7dn.. by de 1mith' ,oolf Q
Nowell in !hapter 5 para 9.$C' it is stated thus-
;) 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. &odies therefore exercise public
functions when they intervene or participate in
social or economic affairs in the public interest. :his
may happen in a wide variety of ways. For instance'
a body is performing a public function when it
provides ;public goods; or other collective services'
such as health care' education and personal social
services' from funds raised by taxation. ) body may
perform public functions in the form of adjudicatory
services 6such as those of the criminal and civil
courts and tribunal system.. :hey also do so if they
regulate commercial and professional activities to
ensure compliance with proper standards. For all
these purposes' a range of legal and administrative
techni+ues may be deployed' including- rule-
making' adjudication 6and other forms of dispute
resolution.0 inspection0 and licensing.
ublic functions need not be the exclusive domain
of the state. !harities' self-regulatory organiOations
and other nominally private institutions 6such as
Page 112 of 162
universities' the 1tock 7xchange' Kloyd4s of Kondon'
churches. may in reality also perform some types of
public function. )s 1ir Nohn /onaldson 2.#. urged' it
is important for the courts to ;recognise the
realities of executive power; and not allow ;their
vision to be clouded by the subtlety and sometimes
complexity of the way in which it can be exerted;.
<on-governmental bodies such as these are just as
capable of abusing their powers as is government.;
($. In #egina v. anel on :ake-overs and 2erges' 7x
parte /atafin lc. )nd another 6(*@E. ( Mueen4s &ench
/ivision @(%' a +uestion arose whether the anel of :ake-
overs and 2ergers had acted in concert with other
parties in breach of the !ity !ode on :ake-overs and
2ergers. :he panel dismissed the complaint of the
applicants. :hough the anel on :ake-over and 2ergers
was purely a private body' the !ourt of )ppeal held that
the supervisory jurisdiction of the Bigh !ourt was
adaptable and could be extended to any body which
performed or operated as an integral part of a system
which performed public law duties' which was supported
by public law sanctions and which was under an
obligation to act judicially' but whose source of power
was not simply the consent of those over whom it
exercised that power0 that although the panel purported
to be part of a system of self- regulation and to derive its
powers solely from the consent of those whom its
decisions affected' it was in fact operating as an integral
part of a governmental framework for the regulation of
financial activity in the !ity of Kondon' was supported by
a periphery of statutory powers and penalties' and was
under a duty in exercising what amounted to public
powers to act judicially0 that' therefore' the court had
jurisdiction to review the panel4s decision to dismiss the
applicants4 complaint0 but that since' on the facts' there
were no grounds for interfering with the panel4s decision'
the court would decline to intervene.
(5. Kloyd K.N.' agreeing with the opinion expressed by 1ir
Nohn /onaldson 2.#. held -
;I do not agree that the source of the power is the
Page 113 of 162
sole test whether a body is subject to judicial
review' nor do I so read Kord /iplock4s speech. Df
course the source of the power will often' perhaps
usually' be decisive. If the source of power is a
statute' or subordinate legislation under a statute'
then clearly the body in +uestion will be subject to
judicial review. If at the end of the scale' the source
of power is contractual' as in the case of private
arbitration' then clearly the arbitrator is not subject
to judicial review.
(C. In that decision' they approved the observations
made by Kord /iplock in !ouncil of !ivil 1ervice Jnions
vs. 2inister for the !ivil 1ervice 6(*@%. ).!. 5EC' C9*
wherein it was held-
;For a decision to be susceptible to judicial review
the decision- maker must be empowered by public
law 6and not merely' as in arbitration' by agreement
between private parties. to make decisions that' if
validly made' will lead to administrative action or
abstention from action by an authority endowed by
law with executive powers which have one or other
of the conse+uences mentioned in the preceding
paragraph. :he ultimate source of the decision-
making power is nearly always nowadays a statute
or subordinate legislation made under the statute0
but in the absence of any statute regulating the
subject matter of the decision the source of the
decision-making power may still be the common law
itself' i.e.' that part of the common law that is given
by lawyers the label of 4the prerogative.4 ,here this
is the source of decision-making power' the power
is confined to executive officers of central as
distinct from local government and in constitutional
practice is generally exercised by those holding
ministerial rank;
(%. It is also pertinent to refer to 1ir Nohn /onaldson 2.#.
in that :ake-Dver anel case -
;In all the reports it is possible to find enumerations
Page 114 of 162
of factors giving rise to the jurisdiction' essential or
as being exclusive of other factors. ossibly the only
essential elements are what can be described as a
public element' which can take many different
forms' and the exclusion from the jurisdiction of
bodies whose sole source of power is a consensual
submission to is jurisdiction.;
(F. :he above guidelines and principles applied by
7nglish courts cannot be fully applied to Indian conditions
when exercising jurisdiction under )rticle $$F or 5$ of
the !onstitution. )s already stated' the power of the Bigh
!ourts under )rticle $$F is very wide and these powers
have to be exercised by applying the constitutional
provisions and judicial guidelines and violation' if any' of
the fundamental rights guaranteed in art III of the
!onstitution. In the matter of employment of workers by
private bodies on the basis of contracts entered into
between them' the courts had been reluctant to exercise
the powers of judicial review and whenever the powers
were exercised as against private employers' it was
solely done based on public law element involved
therein.
(E. :his view was expressly stated by this !ourt in
various decisions and one of the earliest decisions is the
raga :ools !orporation v. 1hri !.). Imanual and Dthers
6(*F*. ( 1!! %@% In this case' the appellant company
was a company incorporated under the Indian !ompanies
)ct and at the material time the Jnion 8overnment and
the 8overnment of )ndhra radesh held %F per cent and
5$ per cent of its shares respectively. #espondent
workmen filed a writ petition under )rticle $$F in the
Bigh !ourt of )ndhra radesh challenging the validity of
an agreement entered into between the employees and
the company' seeking a writ of mandamus or an order or
direction restraining the appellant from implementing the
said agreement. :he appellant raised objection as to the
maintainability of the writ petition. :he learned 1ingle
Nudge dismissed the petition. :he /ivision &ench held
that the petition was not maintainable against the
company. Bowever' it granted a declaration in favour of
three workmen' the validity of which was challenged
before this !ourt. :his !ourt held at pages %@*-%*9 as
Page 115 of 162
under-
;....that the applicant for a mandamus should have
a legal and specific right to enforce the
performance of those dues. :herefore' the condition
precedent for the issue of mandamus is that there
is in one claiming it a legal right to the performance
of a legal duty by one against whom it is sought. )n
order of mandamus is' in form' a command directed
to a person' corporation or any inferior tribunal
re+uiring him or them to do s particular thing
therein specified which appertains to his or their
office and is in the nature of a public duty. It is'
however' not necessary that the person or the
authority on whom the statutory duty is imposed
need be a public official or an official body. )
mandamus can issue' for instance' to an official of a
society to compel him to carry out the terms of the
statute under or by which the society is constituted
or governed and also to companies or corporations
to carry out duties placed on them by the statutes
authoriOing their undertakings. ) mandamus would
also lie against a company constituted by a statute
for the purpose of fulfilling public responsibilities
H!f. Balsbury4s Kaws of 7ngland 65rd 7d..' "ol.II p %$
and onwardsI.
:he company being a non-statutory body and one
incorporated under the !ompanies )ct there was
neither a statutory nor a public duty imposed on it
by a statute in respect of which enforcement could
be sought by means of a mandamus' nor was there
in its workmen any corresponding legal right for
enforcement of any such statutory or public duty.
:he Bigh !ourt' therefore' was right in holding that
no writ petition for a mandamus or an order in the
nature of mandamus could lie against the
company.;
(@. It was also observed that when the Bigh !ourt had
held that the writ petition was not maintainable' no relief
of a declaration as to invalidity of an impugned
agreement between the company and its employees
Page 116 of 162
could be granted and that the Bigh !ourt committed an
error in granting such a declaration.
(*. In "1: Industries Kimited vs. "1: Industries ,orkers4
Jnion Q )nr. 6$99(. ( 1!! $*@' the very same +uestion
came up for consideration. :he appellant-company was
engaged in the manufacture and sale of cigarettes. )
petition was filed by the first respondent under )rticle
$$F of the !onstitution seeking a writ of mandamus to
treat the members of the respondent Jnion' who were
employees working in the canteen of the appellant4s
factory' as employees of the appellant and for grant of
monetary and other conse+uential benefits. 1peaking for
the &ench' #ajendra &abu' N.' 6as he then was.' held as
follows -
;E. In de 1mith' ,oolf and Nowell4s Nudicial #eview of
)dministrative )ction' %th 7dn.' it is noticed that not
all the activities of the private bodies are subject to
private law' e.g.' the activities by private bodies
may be governed by the standards of public when
its decisions are subject to duties conferred by
statute or when by virtue of the function it is
performing or possible its dominant position in the
market' it is under an implied duty to act in the
public interest. &y way of illustration' it is noticed
that a private company selected to run a prison
although motivated by commercial profit should be
regarded' at least in relation to some of its
activities' as subject to public law because of the
nature of the function it is performing. :his is
because the prisoners' for whose custody and care
it is responsible' are in the prison in conse+uence of
an order of the court' and the purpose and nature of
their detention is a matter of public concern and
interest. )fter detailed discussion' the learned
authors have summariOed the position with the
following propositions -
=1> 6!e test of a w!et!er a body is performing
a p/blic f/nction" and is !ence amenable to
8/dicial review" may not depend /pon t!e
so/rce of its power or w!et!er t!e body is
Page 117 of 162
ostensibly a @p/blic@ or a @private@ body.
=2> 6!e principles of 8/dicial review prima
facie govern t!e activities of bodies
performing p/blic f/nctions.
=3> Aowever" not all decisions taken by bodies
in t!e co/rse of t!eir p/blic f/nctions are t!e
s/b8ect matter of 8/dicial review. ,n t!e
following two sit/ations 8/dicial review will
not normally be appropriate even t!o/g! t!e
body may be performing a p/blic f/nction
=a> 4!ere some ot!er branc! of t!e law more
appropriately governs t!e disp/te between
t!e parties. ,n s/c! a case" t!at branc! of t!e
law and its remedies s!o/ld and normally will
be applied: and
=b> 4!ere t!ere is a contract between t!e
litigants. ,n s/c! a case t!e e2press or
implied terms of t!e agreement s!o/ld
normally govern t!e matter. 6!is reflects t!e
normal approac! of %nglis! law" namely" t!at
t!e terms of a contract will normally govern
t!e transaction" or ot!er relations!ip between
t!e parties" rat!er t!an t!e general law. 6!/s"
w!ere a special met!od of resolving disp/tes
=s/c! as arbitration or resol/tion by private or
domestic trib/nals> !as been agreed /pon by
t!e parties =e2pressly or by necessary
implication>" t!at regime" and not 8/dicial
review" will normally govern t!e disp/te.
$9. )pplying the above principles' this !ourt held that the
Bigh !ourt rightly held that it had no jurisdiction.
$(. )nother decision on the same subject is 8eneral
2anager' Aisan 1ahkar !hini 2ills Kimited' 1ultanpur' J
vs. 1atrughan <ishad and Drs. 6$995. @ 1!! F5*. :he
appellant was a cooperative society and was engaged in
Page 118 of 162
the manufacture of sugar. :he respondents were the
workers of the appellant and they filed various writ
petitions contending that they had to be treated as
permanent workmen. :he appellant challenged the
maintainability of those writ petitions and applying the
principles enunciated in "1: Industries4 case 6supra.' it
was held by this !ourt that the Bigh !ourt had no
jurisdiction to entertain an application under )rticle $$F
of the !onstitution as the mill was engaged in the
manufacture and sale of sugar which would not involve
any public function.
$$. In Federal &ank Kimited vs. 1agar :homas Q Drs.
6$995. (9 1!! E55' the respondent was working as a
&ranch 2anager of the appellant &ank. Be was
suspended and there was a disciplinary en+uiry wherein
he was found guilty and dismissed from service. :he
respondent challenged his dismissal by filing a writ
petition. :he learned 1ingle Nudge held that the Federal
&ank was performing a public duty and as such it fell
within the definition of ;other authorities; under )rticle
($ of the !onstitution. :he appellant bank preferred an
appeal' but the same was dismissed and the decision of
the /ivision &ench was challenged before this !ourt. :his
!ourt observed that a private company carrying on
business as a scheduled bank cannot be termed as
carrying on statutory or public duty and it was therefore
held that any business or commercial activity' whether it
may be banking' manufacturing units or related to any
other kind of business generating resources'
employment' production and resulting in circulation of
money which do have an impact on the economy of the
country in general' cannot be classified as one falling in
the category of those discharging duties or functions of a
public nature. It was held that that the jurisdiction of the
Bigh !ourt under )rticle $$F could not have been
invoked in that case.
$5. :he counsel for the respondent in !ivil )ppeal <o.
(*EF of (**@ and for the appellant in the civil appeal
arising out of 1K6!ivil. <o. F9(F of $99$ strongly
contended that irrespective of the nature of the body' the
writ petition under )rticle $$F is maintainable provided
such body is discharging a public function or statutory
Page 119 of 162
function and that the decision itself has the flavour of
public law element and they relied on the decision of this
!ourt in )ndi 2ukta 1adguru 1hree 2uktajee "andas
1wami 1uvarna Nayanti 2ahotsav 1marak :rust Q Drs. "s.
".#. #udani Q Drs 6(*@*. $ 1!! F*(. In this case' the
appellant was a :rust running a science college affiliated
to the 8ujarat Jniversity under 8ujarat Jniversity )ct'
(*C*. :he teachers working in that college were paid in
the pay scales recommended by the Jniversity 8rants
!ommission and the college was an aided institution.
:here was some dispute between the Jniversity :eachers
)ssociation and the Jniversity regarding the fixation of
their pay scales. Jltimately' the !hancellor passed an
award and this award was accepted by the 1tate 8ovt. as
well as the Jniversity and the Jniversity directed to pay
the teachers as per the award. :he appellants refused to
implement the award and the respondents filed a writ
petition seeking a writ of mandamus and in the writ
petition the appellants contended that the college
managed by the :rust was not an ;authority; coming
within the purview of )rticle ($ of the !onstitution and
therefore the writ petition was not maintainable. :his
plea was rejected and this !ourt held that the writ of
mandamus would lie against a private individual and the
words ;any person or authority; used in )rticle $$F are
not to be confined only to statutory authorities and
instrumentalities of the 1tate and they may cover any
other person or body performing public duty. :he form of
the body concerned is not very much relevant. ,hat is
relevant is the nature of the duty imposed on the body.
:he duty must be judged in the light of positive obligation
owed by the person or authority to the affected party. <o
matter by what means the duty is imposed' if a positive
obligation exists' mandamus cannot be denied.
$*. 6!/s" it can be seen t!at a writ of mandam/s or
t!e remedy /nder Article 22? is pre3eminently a
p/blic law remedy and is not generally available as
a remedy against private wrongs. ,t is /sed for
enforcement of vario/s rig!ts of t!e p/blic or to
compel t!e p/blicBstat/tory a/t!orities to
disc!arge t!eir d/ties and to act wit!in t!eir
bo/nds. ,t may be /sed to do 8/stice w!en t!ere is
wrongf/l e2ercise of power or a ref/sal to perform
d/ties. 6!is writ is admirably e;/ipped to serve as
Page 120 of 162
a 8/dicial control over administrative actions. 6!is
writ co/ld also be iss/ed against any private body
or person" specially in view of t!e words /sed in
Article 22? of t!e -onstit/tion. Aowever" t!e scope
of mandam/s is limited to enforcement of p/blic
d/ty. 6!e scope of mandam/s is determined by t!e
nat/re of t!e d/ty to be enforced" rat!er t!an t!e
identity of t!e a/t!ority against w!om it is so/g!t.
,f t!e private body is disc!arging a p/blic f/nction
and t!e denial of any rig!t is in connection wit!
t!e p/blic d/ty imposed on s/c! body" t!e p/blic
law remedy can be enforced. 6!e d/ty cast on t!e
p/blic body may be eit!er stat/tory or ot!erwise
and t!e so/rce of s/c! power is immaterial" b/t"
nevert!eless" t!ere m/st be t!e p/blic law
element in s/c! action. 1ometimes' it is difficult to
distinguish between public law and private law remedies.
)ccording to Balsbury4s Kaws of 7ngland 5rd ed. "ol. 59'
page-F@$'
;a public authority is a body not necessarily a
county council' municipal corporation or other local
authority which has public statutory duties to
perform and which perform the duties and carries
out its transactions for the benefit of the public and
not for private profit.;
6!ere cannot be any general definition of p/blic
a/t!ority or p/blic action. 6!e facts of eac! case
decide t!e point.
59. ) contract would not become statutory simply
because it is for construction of a public utility and it has
been awarded by a statutory body. &ut nevertheless it
may be noticed that the 8overnment or 8overnment
authorities at all levels is increasingly employing
contractual techni+ues to achieve its regulatory aims. It
cannot be said that the exercise of those powers are free
from the Oone of judicial review and that there would be
no limits to the exercise of such powers' but in normal
circumstances' judicial review principles cannot be used
to enforce the contractual obligations. ,hen that
contractual power is being used for public purpose' it is
Page 121 of 162
certainly amenable to judicial review. :he power must be
used for lawful purposes and not unreasonably.
5(. :he decision of the employer in these two cases to
terminate the services of their employees cannot be said
to have any element of public policy. :heir cases were
purely governed by the contract of employment entered
into between the employees and the employer. It is not
appropriate to construe those contracts as opposed to
the principles of public policy and thus void and illegal
under 1ection $5 of the !ontract )ct. In contractual
matters even in respect of public bodies' the principles of
judicial review have got limited application. :his was
expressly stated by this !ourt in 1tate of J.. vs. &ridge
Q #oof !o. 6(**F. F 1!! $$ and also in Aerala 1tate
7lectricity &oard vs. Aurien 7.Aalathil 6$999. F 1!! $*%.
In the latter case' this !ourt reiterated that the
interpretation and implementation of a clause in a
contract cannot be the subject matter of a writ petition.
,hether the contract envisages actual payment or not is
a +uestion of construction of contract. If a term of a
contract is violated' ordinarily' the remedy is not a writ
petition under )rticle $$F.
5$. )pplying these principles' it can very well be said that
a writ of mandamus can be issued against a private body
which is not a 1tate within the meaning of )rticle ($ of
the !onstitution and such body is amenable to the
jurisdiction under )rticle $$F of the !onstitution and the
Bigh !ourt under )rticle $$F of the !onstitution can
exercise judicial review of the action challenged by a
party. &ut there must be a public law element and it
cannot be exercised to enforce purely private contracts
entered into between the parties.
-ince we are on the issue of public functions% we may
also "uote with profit a portion of the decision of the -upreme
#ourt in the case of /atya Pal -ingh 9supra. as contained in
paragraphs =% '1 and '2% which read thus ,
Page 122 of 162
C@. /r. A.1.!hauhan had also relied on the Buman
#ights )ct' (**@ 62eaning of ublic Function. &ill which
sets out the factors to be taken into account in
determining whether a particular function is a public
function for the purpose of sub-section 65.6b. of 1ection F
of the aforesaid )ct. 1ection 6(. enumerates the following
factors which may be taken into account in determining
the +uestion as to whether a function is a function of
public nature.
(6a. the extent to which the state has assumed
responsibility for the function in +uestion0
6b. the role and responsibility of the state in relation
to the subject-matter in +uestion0
6c. the nature and extent of the public interest in
the function in +uestion0
6d. the nature and extent of any statutory power or
duty in relation to the function in +uestion0
6e. the extent to which the 1tate' directly or
indirectly' regulates' supervises or inspects the
performance of the function in +uestion0
6f. the extent to which the 1tate makes payment for
the function in +uestion0
6g. whether the function involves or may involve
the use of statutory coercive powers0
6h. the extent of the risk that improper performance
of the function might violate an individual4s
convention right.
For the avoidance of doubt' for the purposes of 1ection
F65.6b. of the Buman #ights )ct' (**@' as per the said
Page 123 of 162
&ill a function of a public nature includes a function which
is re+uired or enabled to be performed wholly or partially
at public expense' irrespective of -
$. 6a. the legal status of the person who performs
the function' or
6b. whether the person performs the function by
reason of a contractual or other agreement or
arrangement.
%(. :his !ourt also +uoted with approval the
!ommentary on Nudicial #eview of )dministrative )ction
6Fifth 7dn.. by de 1mith' ,oolf Q Nowell in !hapter 5 para
9.$C therein it has been stated as follows -
) body is performing a 4public function4 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. &odies therefore exercise public
functions when they intervene or participate in
social or economic affairs in the public interest.
ublic functions need not be the exclusive domain
of the state. !harities' self-regulatory organiOations
and other nominally private institutions 6such as
universities' the 1tock 7xchange' Kloyd4s of Kondon'
churches. may in reality also perform some types of
public function. )s 1ir Nohn /onaldson 2.#. urged' it
is important for the courts to 4recogniOe the realities
of executive power4 and not allow 4their vision to be
clouded by the subtlety and sometimes complexity
of the way in which it can be exerted4. <on-
governmental bodies such as these are just as
capable of abusing their powers as is 8overnment.
%$. :hese observations make it abundantly clear that in
order for it to be held that the body is performing a
public function' the appellant would have to prove that
the body seeks to achieve some collective benefit for the
Page 124 of 162
public or a section of public and accepted by the public
as having authority to do so.
$n -hri *nadi +u1ta -adguru -hree +u1tajee
Candasjiswami -u!arna /ayanti +ohtsa! -mara1 Trust !.
C.R.Rudani% *$R 1&=& -# 14(;% on which strong reliance has
been placed by +r.-helat in support of his submission
regarding amenability% the -upreme #ourt dealt with the case
of a science college at *hmedabad% which was being which
was being run by a Trust and has temporary affiliation to the
5ujarat Ini!ersity under the 5ujarat Ini!ersity *ct% 1&&%
which% of course% later recei!ed permanent affiliation as
amended by 5ujarat *ct C$ of 1&;3. The Ini!ersity teachers
and those employed in the affiliated colleges were paid in the
pay scale recommended by the Ini!ersity 5rants #ommission.
*t one stage there was some dispute between the Ini!ersity
area teachers *ssociation and the Ini!ersity and the
implementation of certain pay scales. That dispute by
agreement of parties was referred to the #hancellor of the
Ini!ersity for decision. The #hancellor ga!e his award holding
that the re!ised pay scales should be applicable to all
irrespecti!e of the employment under the Ini!ersity and
affiliated college. The -tate 5o!ernment accepted the award of
the #hancellor and issued directions to all affiliated colleges to
pay their teachers in terms thereof. The trustees challenged
the 5o!ernment2s directi!e and approached the Ini!ersity to
terminate the ser!ices of the teachers who were entitled to the
re!ised scale of pay on the ground that they were surplus. The
Cice8#hancellor% howe!er% refused the re"uest of the trustees.
The trustees then decided to close down the college and
surrendered the affiliation of the college to the Ini!ersity.
Page 125 of 162
Teachers mo!ed the Aigh #ourt. The trustees resisted the
prayer on the grounds% inter alia, 91: the Trust is not a
statutory body and is not subject to the writ jurisdiction of the
Aigh #ourtH 92: the resolution of the Ini!ersity directing
payment to teachers in the re!ised pay scales was not binding
on the trustH 93: the Ini!ersity had no power to burden the
trust with additional financial liability by retrospecti!ely
re!ising the pay scalesH 9: the claim for gratuity by retrenched
teachers was untenableH and 9': )rdinance 12(@ prescribing
closure compensation was ultra vires of the powers of the
-yndicate.
The Aigh #ourt rejected the abo!e submissions and
accepted the writ petitions. The trustees mo!ed the -upreme
#ourt. The -upreme #ourt has in the said judgment considered
the "uestion of maintainability of the writ petition under *rticle
224 of the #onstitution in these words 9*$R 1&=& -# 14(; at
pp.141(81413: ,
;:he essence of the attack on the maintainability of the
writ petition under )rt. $$F may now be examined. It is
argued that the management of the college being a trust
registered- under the ublic :rusts )ct is not amenable to
the writ jurisdiction of the Bigh !ourt. :he contention in
other words is that the trust is a private institution
against which no writ of mandamus can be issued. In
support of the contention' the counsel relied upon two
decisions of this !ourt- 6a. 7xecutive !ommittee of "aish
/egree !ollege' 1hamli v. Kakshmi <arain' 6(*EF. $ 1!#
(99F - )I# (*EF 1! @@@ and 6b. /eepak Aumar &iswas v.
/irector of ublic Instruction. In the first of the two cases'
the respondent institution was a /egree !ollege
managed by a registered co-operative society. ) suit was
filed against the college by the dismissed principal for
reinstatement. It was contended that the 7xecutive
Page 126 of 162
!ommittee of the college which was registered under the
!o-operative 1ocieties )ct and )ffiliated to the )gra
Jniversity 6and subse+uently to 2eerut Jniversity. was a
statutory body. :he importance of this contention lies in
the fact that in such a case' reinstatement could be
ordered if the dismissal is in violation of statutory
obligation. &ut this !ourt refused to accept the
contention. It was observed that the management of the
college was not a statutory body since not created by or
under a statute. It was emphasised that an institution
which adopts certain statutory provisions will not become
a statutory body and the dismissed employee cannot
enforce a contract of personal service against a non-
statutory body.
:he decision in "aish /egree !ollege was followed in
/eepak Aumar &iswas case. :here again a dismissed
Kecturer of a private college was seeking reinstatement
in service. :he !ourt refuse to grant the relief although it
was found that the dismissal was wrongful. :his !ourt
instead granted substantial monetary benefits to the
lecturer. :his appears to be the preponderant judicial
opinion because of the common law principle that a
service !ontract cannot be specifically enforced.
&ut here the facts are +uite different and' therefore' we
need not go thus far. :here is no plea for specific
performance of contractual service. :he respondents are
not seeking a declaration that they be continued in
service. :hey are not asking for mandamus to put them
back into the college. :hey are claiming only the terminal
benefits and arrears of salary payable to them. :he
+uestion is whether the trust can be compelled to pay by
a writ of 2andamusL
,f t!e rig!ts are p/rely of a private c!aracter no
mandam/s can iss/e. ,f t!e management of t!e
college is p/rely a private body wit! no p/blic d/ty
mandam/s will not lie. 6!ese are two e2ceptions to
&andam/s. B/t once t!ese are absent and w!en
t!e party !as no ot!er e;/ally convenient remedy"
mandam/s cannot be denied. ,t !as to be
appreciated t!at t!e appellant3tr/st was managing
Page 127 of 162
t!e affiliated college to w!ic! p/blic money is paid
as <overnment aid. P/blic money paid as
<overnment aid plays a ma8or role in t!e control"
maintenance and working of ed/cational
instit/tions. 6!e aided instit/tions like
<overnment instit/tions disc!arge p/blic f/nction
by way of imparting ed/cation to st/dents. 6!ey
are s/b8ect to t!e r/les and reg/lations of t!e
affiliating )niversity. 6!eir activities are closely
s/pervised by t!e )niversity a/t!orities.
%mployment in s/c! instit/tions" t!erefore" is not
devoid of any p/blic c!aracter =.ee 6!e @%volving
,ndian Administrative 1aw by &.P. (ain =1CD3> p
2??>. .o are t!e service conditions of t!e academic
staff. ,hen the Jniversity takes a decision regarding
their pay scales' it will be binding on the management.
:he service conditions of the academic staff are'
therefore' not purely of a private character. It has super-
added protection by Jniversity decisions creating a legal
right-duty relationship between the staff and the
management. ,hen there is existence of this
relationship' mandamus cannot be refused to the
aggrieved party.
:he law relating to mandamus has made the most
spectacular advance. It may be recalled that the remedy
by prerogative writs in 7ngland started with very limited
scope and suffered from many procedural disadvantages.
:o overcome the difficulties' Kord 8ardiner 6the Kord
!hancellor. in pursuance of 1ection 56l.6e. of the Kaw
!ommission )ct' (*F%' re+uested the law !ommission to
review the existing remedies for the judicial control of
administrative acts and commissions with a view to
evolving a simpler and more effective procedure. :he
Kaw !ommission made their report in 2arch' (*EF 6Kaw
!om <o. E5. it was implemented by #ules of !ourt 6Drder
%5. in (*EE and given statutory force in (*@V by 1ection
5( of the 1upreme !ourt )ct' (*@(. It combined all the
former remedies into one proceeding called judicial
review. Kord /enning explains the scope of this ;Nudicial
review;-
;)t one stroke the courts could grant whatever
relief was appropriate. <ot only certiorari and
Page 128 of 162
mandamus' but also declaration and injunction.
7ven damages. :he procedure was much more
simple and expeditious. Nust a summons instead of
a writ. <o formal pleadings. :he evidence was given
by affidavit. )s a rule no cross-examination' no
discovery' and so forth. &ut there were important
safeguards. In particular' in order to +ualify' the
applicant had to get the leave of a judge.
:he statute is phrased in flexible terms. It gives
scope for development. It uses the words ;having
regard to;. :hose words are very indefinite. :he
result is that the courts are not bound hand and
foot by the previous law. :hey are to 4have regard
to4 it. 1o the previous law as to who are - and who
are not - public authorities' is not absolutely
binding. <or is the previous law as to this matters in
respect of which relief may be granted. :his means
that the judges can develop the public law as they
think best. :hat they have done and are doing.;
6see - :he !losing !hapter by #t. Bon. Kord /enning
p. ($$.
:here' however' the prerogative writ of mandamus
confined only to public authorities to compel
performance of public duty. :he 4public authority4
for them means everybody which is created by
statute - and whose powers and duties are defined
by statute. 1o 8overnment departments' local
authorities' police authorities' and statutory
undertakings and corporations' are all 4public
authorities4. &ut there is no such limitation for our
Bigh !ourts to issue the writ 4in the nature of
mandamus4. )rticle $$F confers wide powers on the
Bigh !ourts to issue writs in the nature of
prerogative writs. :his is a striking departure from
the 7nglish law. Jnder )rticle $$F' writs can be
issued to 4any person or authority4. It can be issued
4for the enforcement of any of the fundamental
rights and for any other purpose.;
)rticle $$F reads-
;$$F. ower of Bigh !ourts to issue certain writs.--
Page 129 of 162
6(. <otwithstanding anything in )rt. 5$' every Bigh
!ourt shall have power throughout the territories in
relation to which it exercises jurisdiction' to issue to
any person or authority including in appropriate
cases' any 8overnment' within those territories
directions' orders or writs' including 6writs in the
nature of habeas corpus' mandamus' prohibition'
+uo warranto and certiorari. or any of them for the
enforcement of any of the rights conferred by art
III and for any other purpose.
xxxx xxxx xxxx xxxx xxxx
:he scope of this article has been explained by 1ubba
#ao' N.' in /warkanath v. Income-tax Dfficer' )I# (*FF 1!
@( at pp.@C-@%'
:his article is couched in comprehensive phraseology and
it ex facie confers a wide power on the Bigh !ourts to
reach injustice wherever it is found. :he !onstitution
designedly used a wide language in describing the nature
of the power' the purpose for which and the person or
authority against whom it can be exercised. It can issue
writs in the nature of prerogative writs as understood in
7ngland0 but the use of the expression ;nature;' for the
said expression does not e+uate the writs that can be
issued in India with those in 7ngland' but only draws an
analogy from them. :hat apart' Bigh !ourts can also
issue directions' orders or writs other than the
prerogative writs. It enables the Bigh !ourts to mould the
reliefs to meet the peculiar and complicated
re+uirements of this country. )ny attempt to e+uate the
scope of the power of the Bigh !ourt under )rt. $$F of
the !onstitution with that of the 7nglish !ourts to issue
prerogative writs is to introduce the unnecessary
procedural restrictions grown over the years in a
comparatively small country like 7ngland with a unitary
form of 8overnment into a vast country like India
functioning under a federal structure. 1uch a construction
defeats the purpose of the article itself.;
6!e term @a/t!ority@ /sed in Art. 22?" in t!e
conte2t" m/st receive a liberal meaning /nlike t!e
term in Art. 12. Article 12 is relevant only for t!e
Page 130 of 162
p/rpose of enforcement of f/ndamental rig!ts
/nder Art. 32. Article 22? confers power on t!e
Aig! -o/rts to iss/e writs for enforcement of t!e
f/ndamental rig!ts as well as non3f/ndamental
rig!ts. 6!e words @Any person or a/t!ority@ /sed
in Art. 22? are" t!erefore" not to be confined only
to stat/tory a/t!orities and instr/mentalities of
t!e .tate. 6!ey may cover any ot!er person or
body performing p/blic d/ty. 6!e form of t!e body
concerned is not very m/c! relevant. 4!at is
relevant is t!e nat/re of t!e d/ty imposed on t!e
body. 6!e d/ty m/st be 8/dged in t!e lig!t of
positive obligation owed by t!e person or
a/t!ority to t!e affected9 party. $o matter by
w!at means t!e d/ty is imposed. ,f a positive
obligation e2ists mandam/s cannot be denied.
In raga :ools !orporation v. !.". Imanual' ' this !ourt
said that a mandamus can issue against a person or body
to carry but the duties placed on them by the 1tatutes
even though they are not public officials or statutory
body. It was observed 6at p. EE@ of (*F*-5 1!#.- 6at pp
(59*-(9 of )I#.-
;It is' however' not necessary that the person or the
authority on whom the statutory duty is imposed
need be a public officials or an official body. )
mandamus can issue' for instance' to an official of a
society to compel him to carry out the terms of the
statute under or by which the society is constituted
or governed and also' to companies or corporations
to carry out duties placed on them by the statutes
authorising their undertakings. ) mandamus would
also lie against a company constituted by a statute
for the purpose of fulfilling public responsibilities.
61ee Balsbury4s Kaw of 7ngland 65rd 7d. "ol. II p. %$
and onwards..;
Bere again we may point out that mandamus cannot be
denied on the ground that the duty to be enforced is not
imposed by the statute. !ommenting on the
development of this law' rofessor /e 1mith states- ;:o
be enforceable by mandamus a public duty does not
Page 131 of 162
necessarily have to be one imposed by statute. It may be
sufficient for the duty to have been imposed by charter'
common law' custom or even contract.; 6Nudicial #eview
of )dministrative )ct Cth 7d. p %C9.. ,e share this view.
:he judicial control over the fast expanding maOe of
bodies affecting the rights of the people should not be
put into watertight compartment. It should remain
flexible to meet the re+uirements of variable
circumstances. 2andamus is a very wide remedy which
must be easily available lo reach injustice whenever it is
found;. :echnicalities should not come in the way of
granting that relief under )rt. $$F. ,e' therefore' reject
the contention urged for the appellants on the
maintainability of the writ petition.
The ratio discernible from -hri *nadi +u1ta -adguru
9supra: is that% the form of the body concerned is not !ery
much rele!ant. What is rele!ant is the nature of duty imposed
on the body. * writ of mandamus can be issued against a
person or a body to carry out the duties placed on them by the
statute% e!en though they are not public officials or statutory
bodies.
$n Praga Tools #orporation !. #.C. $mmaneul% *$R 1&4& -#
13(4% the -upreme #ourt obser!ed,
;)rticle $$F provides that every Bigh !ourt shall have
power to issue to any person or authority orders and writ'
including writs in the nature of habeas corpus'
mandamus' etc.' or any of them for the enforcement of
any of the rights conferred by art-Ill of the !onstitution
and for any other purpose. &ut' it is well understood that
a mandamus lies to secure the performance of a public or
statutory duty in the performance of which the one who
applies for it has a sufficient legal interest.
:herefore' the condition precedent for the issue of
Page 132 of 162
mandamus is that there is. one claiming it a legal right to
the performance of a legal duty by one against whom it is
sought. )n order of mandamus' is' in form' a command
directed to a person' corporation or inferior :ribunal
re+uiring him or them to do a particular thing therein
specified which appertains to his or their office and is in
the nature of a public duty. It is' however' not necessary
that the person on the authority on whom the statutory
duty is imposed need be a public official or an official
body.
It is therefore' clear that a writ of mandamus is an
extraordinary remedy. It is in form a command directed
to a person' corporation or an inferior :ribunal re+uiring
him or them to do a particular thing therein specified
which appertains to his or their office and is in the nature
of a public duty. .o long as t!e d/ty t!at is so/g!t
to be performed is in t!e nat/re of a p/blic d/ty" it
is not necessary t!at t!e person or t!e a/t!ority
on w!ic! t!e d/ty is imposed s!o/ld be a p/blic
official or an official body. ,t is f/rt!er necessary
t!at t!e person claiming a #writ of mandam/s m/st
!ave a legal rig!t to t!e performance of a legal
d/ty by t!e one against w!om t!e writ is so/g!t.
What is discernible from an eDhausti!e re!iew of the
case8law% considered and discussed abo!e% may be summed
up thus,
91: <or issuing writ against a legal entity% it would ha!e
to be an instrumentality or agency of a -tate or should
ha!e been entrusted with such functions as are
5o!ernmental or closely associated therewith by being of
public importance or being fundamental to the life of the
people and hence 5o!ernmental.
92: * writ petition under *rticle 224 of the #onstitution
Page 133 of 162
of $ndia may be maintainable against 9i: the -tate
5o!ernmentH 9ii: *uthorityH 9iii: a statutory bodyH 9i!: an
instrumentality or agency of the -tateH 9!: a company
which is financed and owned by the -tateH 9!i: a pri!ate
body run substantially on -tate fundingH 9!ii: a pri!ate
body discharging public duty or positi!e obligation of
public natureH and 9!iii: a person or a body under liability
to discharge any function under any -tatute% to compel it
to perform such a statutory function.
93: *lthough a pri!ate ban1ing company li1e the
-tandard #hartered 0an1 with which we are concerned is
duty bound to follow and abide by the guidelines
pro!ided by the Reser!e 0an1 of $ndia for smooth
conduct of its affairs in carrying on its business% yet those
are of regulatory measures to 1eep a chec1 and pro!ide
guideline and not a participatory dominance or control
o!er the affairs of the company.
9: * pri!ate company carrying on ban1ing business as
a -cheduled ban1 cannot be termed as a company
carrying on any public function or public duty.
9': 7ormally% mandamus is issued to a public body or
authority to compel it to perform some public duty cast
upon it by some statute or statutory rule. $n eDceptional
cases a writ of mandamus or a writ in the nature of
mandamus may issue to a pri!ate body% but only where a
public duty is cast upon such pri!ate body by a statute or
Page 134 of 162
statutory rule and only to compel such body to perform
its public duty.
94: +erely because a statue or a rule ha!ing the force
of a statute re"uires a company or some other body to do
a particular thing% it does not possess the attribute of a
statutory body.
9;: $f a pri!ate body is discharging a public function and
the denial of any rights 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% ne!ertheless% there must be the
public law element in such action.
9=: *ccording to Aalsbury2s Laws of @ngland% 3
rd
@d.
Col.3(% p.4=2% Ea public authority is a body not
necessarily a county council% municipal corporation or
other local authority which has public statutory duties to
perform and which perform the duties and carries out its
transactions for the benefit of the public and not for
pri!ate profitF. There cannot be any general definition of
public authority or public action. The facts of each case
decide the point.
We are again posing a "uestion for our consideration. The
answer to the same should put an end to the matter.
Page 135 of 162
The +aster #ircular relating to the willful defaulters has
been issued by the Reser!e 0an1 of $ndia in eDercise of its
powers under the 0an1ing Regulation *ct% 1&&% and the
Reser!e 0an1 of $ndia *ct% 1&3% !ery much binding to the
-tandard #hartered 0an1% therefore% while acting under the
+aster #ircular for the purpose of declaring a particular
borrower as a willful defaulter% does the ban1 discharge a
public duty.
To put it in other words% if a pri!ate ban1 has failed to
perform its duty in the sense that it has gone beyond the
scope of the regulations of the +aster #ircular% or in
performance of the same% has !iolated any of the fundamental
rights or any other legal rights of the borrower against whom
the action is proposed% then whether such a borrower can
legitimately maintain a writ8application before this #ourt under
*rticle 224 of the #onstitution of $ndia.
* body% public or pri!ate% should not be categori?ed as
EamenableF or Enot amenableF to writ jurisdiction. The most
important and !ital consideration should be the EfunctionF test
as regards the maintainability of a writ application. $f a public
duty or public function is in!ol!ed% any body% public or pri!ate%
concerned or connection with that duty or function% and limited
to that% would be subject to judicial scrutiny under the
eDtraordinary writ jurisdiction of *rticle 224 of the #onstitution
of $ndia.
Page 136 of 162
$n the case of L$# of $ndia !. @scorts Ltd.% *$R 1&=4 -#
13;(% it was contended before the -upreme #ourt that the Life
$nsurance #orporation was an instrumentality of the -tate% and
was debarred by *rticle 1 from acting arbitrarily. $t was also
contended that it was obligatory upon the #orporation to
disclose the reasons for its action complained of% namely% its
re"uisition to call an eDtra8ordinary general meeting of the
company for the purpose of mo!ing a Resolution to remo!e
some 6irectors and appoint others in their place. -uch
argument was opposed by the -tate% contending that the
actions of the -tate or an instrumentality of the -tate% which
do not properly belong to the field of public law but belong to
the field of pri!ate law% were not subject to judicial re!iew.
6ealing with the said contentions% the -upreme #ourt obser!ed
,8
;,hile we do find considerable force in the contention of
the learned )ttorney-8eneral it may not be necessary for
us to enter into any lengthy discussion of the topic' as we
shall presently see. ,e also desire to warn ourselves
against readily referring to 7nglish cases on +uestions of
!onstitutional law4 )dministrative Kaw and ublic Kaw as
the law in India in these branches has forced ahead of
the law in 7ngland' guided as we are by our !onstitution
and uninhibited as we are by the technical rules which
have hampered the development of the 7nglish law.
,hile we do not for a moment doubt that every action of
the 1tate or an instrumentality of the 1tate must be
informed by reason and that' in appropriate cases actions
uninformed by reason may be +uestioned as arbitrary in
proceedings under )rt.$$F or )rt.5$ of the !onstitution'
we do not construe )rt.(C as a charter for judicial review
of 1tate actions and to call upon the 1tate to account for
its actions in its manifold activities by stating reason0 for
such actions.
For example' if the action of the 1tate is political or
sovereign in character' the !ourt will keep away from it
Page 137 of 162
4the !ourt will not debate academic matters or concern
itself with the intricacies of trade and commerce. If the
action of the 1tate is related to contractual obligation or
obligations arising out of the contract' the !ourt may not
ordinarily examine it unless the action has some public
law character attached to it. &roadly speaking' the !ourt
will examine actions of 1tate if they pertain to the public
law domain and refrain from examining them if they
pertain to the private law field. :he difficulty will lie in
demarcating the frontier between the public law domain
and the private law field. It is impossible to draw the line
with precision and we do not want to attempt it. 6!e
;/estion m/st be decided in eac! case wit!
reference to t!e partic/lar action" t!e activity in
w!ic! t!e .tate or t!e instr/mentality of t!e .tate
is engaged w!en performing t!e action" t!e p/blic
law or private law c!aracter of t!en action and a
!ost of ot!er relevant circ/mstances. ,hen the
1tate or an instrumentality of the 1tate ventures into the
corporate world and purchases the shares of a company'
it assumes to itself the ordinary role of a share holder'
and dons the robes of a share-holder' with all the rights
available to such a share-holder there is no reason why
the 1tate as a share-holder should be expected to state
its reasons when it seeks to change the management' by
a resolution of the !ompany' like any other share-
holder..;
/istinction between Wpublic law4 and Wprivate law4 -
/ifficult as this distinction is and incapable of precise
demarcation' it is yet necessary to keep the broad
distinction in mind. Kord /enning in his book ;:he !losing
!hapter; has this to say on the subject-
;:he first thing to notice is that public law is confined to
Wpublic authorities4. ,hat are 4public authorities4L :here
is only one avenue of )pproach. It is by asking' in the
words of 1ection 5(6$.6b. of the 1upreme !ourt )ct
(*@( -
,hat is the 4nature of the persons and bodies against
whom relief may be granted by such orders4' that is' by
mandamus' prohibition or certiorariL
:hese are divided into two main categories -
Page 138 of 162
First' the persons or bodies who have legal authority to
determine +uestions affecting the common law or
statutory rights or obligations of other persons as
individuals. :hat is the formula stated by Kord Nustice
)tkin in #. v. 7lectricity !ommissioners' ex parte Kondon
7lectricity Noint !ommittee !o.' 6(*$9. Ktd' 6(*$C.( A&
(E( 3 $9% as broadened by Kord /iplock in D4#eilly v.
2ackman 6(*@$. 5' ,K# (9*F3 ((9C..
1econd' the persons or bodies who are entrusted by
arliament with functions' powers and duties which
involve the making of decisions of a public nature....:o
which I would add the words of Kord 8oddard' !.N. in #. v.
<ational Noint !ouncil for /ental :echnicians' ex parte
<eate 6(*%5. ( M& E9C3E9E.-
;:he bodies to which in modern times the remedies of
these prerogative writs have been applied have all been
statutory bodies on whom arliament has conferred
statutory powers and duties which' when exercised' may
lead to the detriment of subjects who may have to
submit to their jurisdiction;.
&ut those categories are not exhaustive. :he courts can
extend them to any other person or body of a public
nature exercising public duties which it is desirable to
control by the remedy of judicial review.
:here are many cases which give guidance' but I will just
give some illustrations.
%very body w!ic! is created by stat/te and w!ose
powers and d/ties are defined by stat/te is a
#p/blic a/t!ority#. 1o 8overnment departments' local
authorities' police authorities' and statutory undertakings
and corporations' are all Wpublic authorities4. 1o are
members of a statutory tribunal or in+uiry' and the board
of visitors of a prison. :he !riminal Injuries !ompensation
&oard is a public authority. 1o also' I suggest' is a
university incorporated by #oyal charter0 and the
managers of a 1tate 1chool. 1o is the &oundary
!ommission- and the !ommittee of Kloyd4s.
B/t a limited liability company incorporated /nder
Page 139 of 162
t!e -ompanies Acts is not a #p/blic a/t!ority#: =see
6o5er v. $ational <rey!o/nd Racing -l/b 1td.
=1CD3> 6imes" 1? &ay>. $or is an /nincorporated
association like t!e (ockey -l/b... @. 6see pp. ($$'
($5' ($C.
5@. 1ir Barry ,oolf' a Kord Nustice of !ourt of )ppeal'
points out the distinction in the following words --
;I regard public law as being the system which enforces
the proper performance by public bodies of the duties
which they owe to the public. I regard private law as
being the system which protects the private rights of
private individuals or the private rights of public bodies.
6!e critical distinction arises o/t of t!e fact t!at it
is t!e p/blic as a w!ole" or in t!e case of local
government t!e p/blic in t!e locality" w!o are t!e
beneficiaries of w!at is protected by p/blic law
and it is t!e individ/als or bodies entitled to t!e
rig!ts w!o are the beneficiaries of the protection
provided by private law ;. 6see page $$( of his )rticle
;ublic Kaw rivate Kaw - ,hy the /ivideL ) personal
"iew 6published in ;ublic Kaw; 1ummer 6(*@F.;..
:he learned Kaw Kord stated further in the same )rticle'
at page $$5 -
;,hile public law deals only with public bodies' this does
not mean that the activities of public bodies are never
governed by private law. Kike public figures' at least in
theory' public bodies are entitled to have a private life.
:here have been suggestions that in the commercial field
public bodies should adopt different and higher ethical
standards than private individuals' but this is not yet
re+uired as a matter of law and in relation to purely
commercial transactions the same law is applicable'
whether or not a public duty is involved. rima facie' the
same is true in relation to employment. :he servant
employed by a public body ordinarily has the same
private rights as any other servant ;.
:he position may' however' be different pointed out the
learned Kaw Kord if such relationship is circumscribed by
a statutory provision.
5*. In this context' it would be appropriate to refer to two
Page 140 of 162
important 7nglish decisions' where a public duty was
implied even in the absence of a statutory provisions.
:hey are #. v. !riminal Injuries !ompensation &oard' ex
parte Kain 6(*FE. $ )ll 7# EE9' and #. v. anel on take-
overs 6(*@E. ( )ll 7# %FC. In !riminal Injuries
!ompensation &oard' the relevant facts are the following-
In the year (*FC the 8overnment of 8reat &ritian
announced a 1cheme in both Bouses of arliament
providing for compensation to victims of violence and
persons injured while assisting the police. It was a non-
statutory scheme under which compensation was to be
paid ex gratia. :he scheme was to be administered by a
&oard' who were to be provided with money through a
grant-in-aid' out of which payment would be made when
the &oard was satisfied that the compensation was
justified. :he widow of a olice !onstable who was shot in
the face by a suspect whom he was about to +uestion'
and who subse+uently shot himself' applied to the &oard
for compensation. :he &oard awarded compensation' but
made certain deductions' which was +uestioned by way
of certiorari. :he first +uestion before the !ourt was
;whether the &oard are a body of persons amenable to
the supervisory jurisdiction of this !ourtL;. For the &oard
reliance was placed upon the well-known words of )tkin'
K.N.' in4 #.v. 7lectricity !ommissioners 6(*$C. ( A& (E(' at
p. $9% to the effect that the body of persons to be
amenable to writ jurisdiction must have the legal
authority to determine +uestions affecting the rights of
subjects and who are under a duty to act judicially. :he
!ourt held that the said words of )tkin. K. N.' were not
supposed to be exhaustive of the situation where a
certiorari may issue' and pointed out that the &oard'
though not set up under a statute' is set up by the
executive 8overnment' i.e.' under the prerogative' and
that its acts are no less lawful on that account. :he !ourt
observed -
;Indeed' the writ of certiorari has been issued not only to
courts set up by statutes but also to courts whose
authority was derived' inter alia' from the prerogative.
Dnce the jurisdiction is extended' as it clearly has been'
to tribunals as opposed to courts' there is no reason why
the remedy by way of certiorari cannot be invoked to a
body of persons set up under the prerogative. 2oreover'
the &oard' though set up under the prerogative and not
by statute' had in fact the recognition of arliament in
debate and arliament provided the money to satisfy the
Page 141 of 162
&oard4s awards....;.
It was further observed-
;,e have' as it seems to me' reached the position when
the ambit of certiorari can be said to cover every case in
which a body of persons' of a public as opposed to a
purely private or domestic character' has to determine
matters affecting subjects provided always that it has a
duty to act judicially. Kooked at in this way' the &oard in
my judgment comes fairly and s+uarely within the
jurisdiction of this !ourt. :he &oard are' as counsel for
the &oard said' ;a servant of the !rown' charged by the
!rown' by executive instructions' with the duty of
distributing the bounty of the !rown;. :he &oard are
clearly' therefore' performing public duties. 2oreover'
the &oard are +uite clearly under a duty to act judicially;.
:he same idea was put forward by /iplock' K.N.' in his
separate opinion' where he said -
;If new tribunals are established by acts of 8overnment'
the supervisory jurisdiction of the Bigh !ourt extends to
them if they possess the essential characteristics on
which the subjection of inferior tribunals to the
supervisory control of the Bigh !ourt is based...;.
)shworth' N.' justified the issue of certiorari in that case
on the following basis-
;:hey 6&oard. were set up by the executive after the
proposal to set them up had been debated in both
Bouses of arliament' and the money needed to satisfy
their awards is drawn from sums provided by arliament.
It can therefore be said that their existence and their
functions have at least been recogniOed by arliament'
which to my mind has a twofold conse+uence - in the first
place it negatives any notion that the &oard are a private
tribunal' and secondly it confers on the &oard what I may
call a public or official character. :he number of
applications for compensation and the amounts awarded
by the &oard alike show how greatly the general public
are affected by the functioning of the &oard ....;.
C9. :his decision has since been followed and applied in
several 7nglish decisions. It would suffice to refer to #. v.
anel on :akeovers and 2ergers' 7x arte /atafin 6(*@E.
Page 142 of 162
( )ll 7# %FC. :he anel on :ake-overs and 2ergers was a
self-regulating unincorporated association which devised
and operated the !ity !ode on :ake-overs and 2ergers
prescribing a !ode of !onduct to be observed in the take-
overs of listed public companies. :he panel had no direct
statutory' prerogative or common law powers' nor were
its powers based solely on consensus0 its acts were
supported and sustained by certain statutory powers and
penalties introduced after the inception of the anel. )
decision of the panel was sought to be +uestioned by
way of certiorari. Dne of the objections of the
respondents was that the supervisory jurisdiction of the
!ourt was confined to bodies whose power was derived
solely from legislation or the exercise of the prerogative'
and that the power of judicial review did not extend to a
body such as the anel on :akeovers. Dverruling this
objection' it was held that in determining whether the
decisions of a particular body were subject to judicial
review' the !ourt was not confined to considering the
source of that body4s powers and duties' but could also
look to their nature. )ccordingly' if the duty imposed on a
body' whether expressly or by implication' was a public
duty and the body was exercising public law functions'
the !ourt had jurisdiction to entertain an application for
judicial review of that body4s decisions. It was held that'
having regard to the wide-ranging nature and importance
of the matters covered by the !ity !ode on :ake-overs
and 2ergers and to the public conse+uences of
noncompliance with the !ode' the anel on :akeovers
and 2ergers was performing a public duty when
prescribing and administering the !ode and its rules and
was subject to public law remedies. )ccordingly' it was
held that an application for judicial review would lie in an
appropriate case. :he approach to be adopted in such
cases' it was stated by 1ir Nohn /onaldson' 2.#.' is;to
recogniOe the realities of executive power;.:his is what
the learned 2aster of #olls stated --
;In fact' given its novelty' the panel fits surprisingly well
into the format which this court had in mind in #. v.
!riminal Injuries !ompensation &oard 6(*FE-$ M& @FE.. It
is without doubt performing a public duty and an
important one. :his is clear from the expressed
willingness of the 1ecretary of 1tate for :rade and
Industry to limit legislation in the field of take-overs and
mergers and to use the panel as the centerpiece of his
Page 143 of 162
regulation of that market. :he rights of citiOens are
indirectly affected by its decisions' some' but by no
means all of whom' may in a technical sense be said to
have assented to this situation' e.g.' the members of the
1tock 7xchange. )t least in its determination of whether
there has been a breach of the !ode' it has a duty to act
judicially and it asserts that its raison d4etre is to do
e+uity between one shareholder and another. Its source
of power is only partly based on moral persuarion and the
assent of institutions and their members' the bottom line
being the statutory powers exercised by the /epartment
of :rade and Industries and the &ank of 7ngland. In this
context I should be very disappointed if the courts could
not recogniOe the realities of executive power and
allowed their vision to be clouded by the subtlety and
sometimes complexity of the way in which it can be
exerted...;.
:his rule was reiterated in yet another decision of the
!ourt of )ppeal in #. v. anel on :ake-overs and 2ergers'
ex parte 8uinness' 6(*@*. ( )ll 7# %9*. :his was indeed
the approach indicated by 2athew' N. in 1ukhdev v.
&hagatram' )I# (*E% 1! (55(' when the learned Nudge
spoke of ;the governing power' wherever located; being
subjected to ;fundamental constitutional limitations;. :he
learned Nudge felt that ;the need to subject the power
centres to the control of the !onstitution re+uires an
expansion of the concept of 1tate action;. 6see para *5 at
p. (5%$..
*pplying the abo!e test% the 0an1 herein cannot be called
a public body. $t has no duty towards the public. $t2s duty is
towards its account holders% which may include the borrowers
ha!ing a!ailed of the loan facility. $t has no power to ta1e any
action% or pass any order affecting the rights of the members
of the public. The binding nature of its orders and actions is
confined to its account holders and borrowers and to its
employees. $ts functions are also not a1in to 5o!ernmental
functions.
Page 144 of 162
We may also "uote with profit a <ull 0ench decision of
the 0ombay Aigh #ourt in the case of -hamrao Cithal #o8
operati!e 0an1 Ltd. !. Padubidri Pattabhiram 0hat% *$R 1&&3
0ombay &1. The issue before the <ull 0ench of the 0ombay
Aigh #ourt was whether the appellant80an1 was L-tateL within
the meaning of *rticle 12 of the #onstitution of $ndia% and
whether the writ8petition was maintainable against the
appellants. $n !iew of conflict of two decisions of the Aigh
#ourt% the matter was referred to a Larger 0ench for
determination. $t was submitted that a #o8operati!e 0an1%
performed an important public function and that itself was
sufficient for coming to the conclusion that it was a L-tateL
under *rticle 12. $t was also submitted that in a welfare -tate%
the definition of L5o!ernmental functionsL had to be widened
to include within its scope of functions% which were of public
importance. Aence% any organi?ation which performs a public
function must be considered as a L-tateL under *rticle 12. The
<ull 0ench too1 the !iew that it was too broad a proposition
and sounded a note of caution considering the decision of the
-upreme #ourt in the case of *jay Aasai 9supra:. The #ourt
too1 the !iew that e!ery organi?ation which carried out a
function% which was of public importance% did not necessarily
become L-tateL under *rticle 12. #onferment of L-tatehoodL
depended upon !arious other factors also% such as the neDus
of such organi?ations with the -tate% the eDtent of -tate
control etc. The following obser!ations of the <ull 0ench are
worth ta1ing note of ,8
6!ere may be many f/nctions of p/blic
importance w!ic! can be performed by private
Page 145 of 162
organisation also. 4e !ave a large n/mber of
organisations doing important social work vital to
t!e comm/nity. 6!ere are" for e2ample"
organisations w!ic! look after" ed/cate and train
!andicapped persons or t!e blind" provide t!em
wit! 8obs and re!abilitate t!em. 6!ere are private
c!aritable organisations w!ic! may provide free or
s/bsidies !o/sing to t!e poor or free medical aid.
6!ey may s/pply te2t3books to poor st/dents"
frees!ips and sc!olars!ips. 6!ere may be private
organisation engaged in transport of goods and
men. 6!ey perform f/nctions w!ic! are"
/ndo/btedly of p/blic importance: and t!ey
s/bserve a p/blic need. B/t t!is does not
necessarily make s/c! organisations @.tate@ /nder
Art. 12.Banking is /ndo/btedly a f/nction of p/blic
importance. ,n fact" t!e nationalised banks do
carry o/t t!ese f/nctions /nder t!e control of t!e
.tate. B/t t!at does not mean t!at banks w!ic!
are not so controlled" or banks w!ic! are set /p by
private organisations or co3operative societies
become@ .tate@ /nder Article 12. ,n a welfare
.tate" many activities w!ic! are often carried on
by private organisations are /ndertaken by t!e
.tate. ,n s/c! cases t!e ./preme -o/rt !as said
t!at we m/st look at t!e overall position of t!e
organisation in t!e lig!t of t!e ot!er tests also"
especially w!en t!e f/nction of t!e organisation is
not s/c! as can be carried on only by t!e .tate or
is not connected wit! governmental f/nctions.@
What is complained before us is the procedural
arbitrariness on the part of the ban1. We ha!e eDamined the
constitutional !alidity of the +aster #ircular issued by the
Reser!e 0an1 of $ndia at the instance of the petitioners of
-pecial #i!il *pplication 7o.1(12( of 2(1% but it is difficult for
us to also loo1 into the proposed action on the part of the
-tandard #hartered 0an1 on the premise that the show-cause
notice which has been issued is lac1ing in material particulars.
Page 146 of 162
-uch being the position% we hold that the -tandard
#hartered 0an1 being a pri!ate ban1 is not amenable to the
writ jurisdiction of this #ourt under *rticle 224 of the
#onstitution of $ndia.
$f the petitioners are aggrie!ed in any manner with the
mode and method of in"uiry pursuant to the show-cause
notice issued upon them% then it would be open for them to
challenge the same in accordance with law before the
appropriate authority.
We shall now loo1 into the decisions on which strong
reliance has been placed by the learned ad!ocates appearing
on behalf of the petitioners.
$n the case of /.5.@ngineers P!t. Ltd. 9supra:% a wor1s
contract was awarded by the respondents in fa!our of the
appellant. *s the wor1 was not completed within the
contractual period% an eDtension was granted for the period
specified% without le!ying any li"uidated damages. The
contractor continued the wor1 e!en thereafter. *t a later
stage% finding the progress to be sold% the 5o!ernment
terminated the contract. The appellant filed writ petition
challenging the cancellation. Aowe!er% in !iew of the
eDistence of an arbitration clause% the Aigh #ourt referred the
parties to arbitration. The dispute between the parties was
adjudicated by the *rbitrator. <ew counter8claims were also
filed by the respondents% howe!er% all those counter8claims
were rejected. The respondents approached the 6istrict #ourt
under -ection 3 of the *rbitration and #onciliation *ct% 1&&4%
Page 147 of 162
for setting aside the award. Aowe!er% the court dismissed the
petition. The Aigh #ourt set-aside the award on certain
grounds. $n such circumstances% the contractor filed appeal
before the -upreme #ourt. $n the aforesaid factual
bac1ground% the -upreme #ourt had the occasion to consider
the "uestion% whether one party has committed breach or not%
cannot be decided by the party alleging breach. * contract
cannot pro!ide that one party will be the arbiter to decide%
whether he committed breach or the other party committed
breach. -uch "uestion can only be decided by only the
adjudicatory forum% i.e. a court or an *rbitral Tribunal. This
decision of the -upreme #ourt has been relied upon to fortify
the submission can!assed on behalf of the petitioners that the
ban1 who alleges that a particular borrower has committed a
willful default and deser!es to be declared as a willful
defaulter% such adjudication cannot be at the instance of the
ban1 being the complainant itself. $n our opinion% the
aforenoted decision of the -upreme #ourt has no application to
the case at hand for more than one reasons. $n the case
before the -upreme #ourt% there were two parties. )ne was
the contractor and the second Inion of $ndia who assigned the
contract in fa!our of the contractor. The disputes arose
between the two parties regarding amounts to be claimed.
Thus% it could be seen that the contractor had its own
grie!ances. 0oth were interested in their respecti!e claims. $n
such circumstances% the -upreme #ourt obser!ed that whether
the other party committed breach cannot be decided by the
party alleging breach. -uch obser!ations of the -upreme
#ourt should be read in conteDt with the factual situation which
was before the -upreme #ourt. $n the case at hand% it is not a
dispute as such between the petitioners and the ban1 by way
Page 148 of 162
of claims and counter8claims arising from a public wor1s
contract.
$n the case of -adashi! Pra1ash 0rahmachari 9supra:%
fi!e petitions under *rticle 32 of the #onstitution of $ndia by
the heads of fi!e +adhs in the -tate of )rissa were filed
challenging certain pro!isions of the )rissa Aindu Religious
@ndowments *ct% 1&'1% as amended by the )rissa *ct 1= of
1&'% as unconstitutional and ultra vires. The main attac1 was
in respect of -ections 2 and ;&* of the *ct relating to the
schemes for religious of the 1ind as regards the procedure for
framing of the scheme. $n ma1ing the in"uiry% the
#ommissioner and the person or persons associated with him
therein were to consult the Trustee and the person ha!ing
interest. *fter the scheme would be settled and the order
determining the scheme would be published in the prescribed
manner% the Trustee or any person ha!ing interest may% within
siD months of the date of such publication% institute a suit in
the court to modify or set-aside such order. The effect of the
pro!isions under challenge was that a scheme could be framed
by the #ommissioner alone on a report of the *ssistant
#ommissioner on such in"uiry as he would thin1 fit and not by
the #ommissioner in association with one or more 5o!ernment
officers to be appointed for the purpose by the 5o!ernment.
-econdly% there was no right on suit for challenging the !alidity
or the correctness of the scheme framed by the #ommissioner%
but there was an appeal pro!ided directly to the Aigh #ourt. $n
such circumstances% it was urged before the -upreme #ourt
that the pro!isions were in the form of unreasonable
restrictions and were ultra vires and unconstitutional. $t is in
the aforesaid bac1ground that the -upreme #ourt too1 the
Page 149 of 162
!iew that in order to judge% whether the pro!isions in the *ct
operated by way of unreasonable restrictions for the
constitutional purposes% what was necessary to be seen was
whether the person affected got a reasonable chance of
presenting his entire case before the original Tribunal which
had to determine judicially% the "uestion raised and whether
he had a regular appeal to the ordinarily constituted court or
courts to correct the error% if any% of the Tribunal of the first
instance. Relying on such obser!ations of the -upreme #ourt%
it was sought to be contended that in the present case also the
+aster #ircular relating to willful defaulters is by way of
unreasonable restrictions as the ban1 itself would adjudicate
the issue against which there is no pro!ision for an appeal
before any authority. $n our opinion% this decision also is of no
assistance to the petitioners as the facts of the case were
altogether different. The -upreme #ourt noticed few salient
features of the pro!isions of the *ct and the scheme. The
-upreme #ourt noticed that in the initial stage of the framing
of the scheme under the pro!isions of the *ct% there was% first
of all% something in the nature of a preliminary in"uiry by the
judicial officer of the ran1 of the +unshiff followed by a regular
and the full in"uiry before the #ommissioner who was of the
ran1 of the subordinate judge. The $n"uiry before the
#ommissioner was assimilated to and was go!erned by the
pro!isions relating to the trial of suits by enjoining that as far
as may be% the same had to be in accordance with the
pro!isions of the #ode of the #i!il Procedure relating to the
trial of suits. The -upreme #ourt further obser!ed in the said
case that% while under the prior *ct% the in"uiry before the
#ommissioner might well ha!e been of the nature of an
eDecuti!e in"uiry by an @Decuti!e )fficer% the in"uiry under
Page 150 of 162
the *mended *ct by itself is in the nature of a judicial in"uiry
by the judicial officers followed up by right of regular appeal to
the Aigh #ourt. $n the case at hand% there is no "uestion of
any judicial in"uiry in accordance with the pro!isions of the
#i!il Procedure #ode.
$n the case of -tate of Garnata1a 9supra:% the respondent
entered into an agreement with the -tate of +ysore to
purchase paddy on its behalf. #lause 12 of the agreement
related to breach of conditions of the agreement and the
conse"uences that would ensue on such breach. 6isputes
arose between the parties to the contract. $n such
circumstances% the -upreme #ourt obser!ed that it could not
be argued that a right to adjudicate upon a issue relating to
breach of conditions of the contractor would flow from or was
inhered as a right conferred to assess the damages arising
from breach of conditions. The -upreme #ourt further
obser!ed that assuming for the sa1e of arguments that the
terms of #lause 12 of the agreement afforded scope for being
construed as empowering the officer of the -tate to decide
upon the "uestion of breach as well as assess the "uantum of
damages% it could not be thought of that the adjudication by
the officer regarding the breach of the contract could be
sustained under the law because a party to the agreement
cannot be an arbiter in his own cause. The -upreme #ourt
further obser!ed that the interests of justice and e"uity
re"uired that where a party to the contract disputes the
committing of any breach of conditions% the adjudication
should be by an independent person or body and not by the
other party to the contract. The position would be different
only if there was no dispute or there was a consensus between
Page 151 of 162
the contracting parties regarding the breach of conditions.
Aere again% the case is one of contract entered into between
the two parties relating to purchase of paddy under the Paddy
Procurement -cheme% 1&'&. 6isputes arose between the
parties to the contract and% in such circumstances% the
obser!ations noted abo!e fell from the -upreme #ourt. This
decision also% in our opinion% is of no assistance to the
petitioners.
$n the case of $ndian 0an1s *ssociation 9supra:% the issue
before the -upreme #ourt was regarding the authority of the
ban1ers to round up the then eDisting interest rate to (.2'N.
The facts before the -upreme #ourt in brief were that the
$nterest *ct was enacted by the Parliament w.e.f. 1
st
*ugust%
1&; with an object of imposing of taD on the total amount of
interest recei!ed by the -cheduled 0an1>#redit $nstitutions on
loans and ad!ances. $t was% howe!er% withdrawn in the year
1&;=% but reintroduced in the year 1&=(H where after% it was
again withdrawn in the year 1&='. The said taD% howe!er% was
reintroduced w.e.f. 1
st
)ctober% 1&&1% by reason of the <inance
*ct% 1&&1. The Reser!e 0an1 of $ndia% vide its circular letter
dated 2
nd
-eptember 1&&1% ad!ised all the -cheduled
#ommercial 0an1s that the $ncident or $nterest taD should
prorate be passed on to the borrowers where for a uniform
practice should be followed in consultation with the appellant
before the -upreme #ourt% !i?. $ndian 0an1s3 *ssociation. The
$ndian 0an1s2 *ssociation acted pursuant to the circular% as
also with a !iew to formulate a structure of uniform interest
rate chargeable after including interest taD payable% which was
passed on to the borrowers by the ban1 concerned% ad!ised
them that the rate of interest be loaded with the interest taD of
Page 152 of 162
3N and rounded8up to the neDt higher (.2'N. The Reser!e
0an1 of $ndia ga!e its appro!al to the proposal of the first
appellant before the -upreme #ourt. -uch action on the part of
the appellants therein was "uestioned by the respondents in a
public interest litigation filed before the Garnata1a Aigh #ourt%
inter alia% on the ground that purported rounding up was illegal
and without jurisdiction as thereby the taD elements came to
be increased and as a result thereof the ban1s collected an
additional sum of Rs.;23.;& crores annually by way of
resorting to rounding up on the basis thereof. $n the aforesaid
factual situation% the -upreme #ourt too1 the !iew that the
Reser!e 0an1 of $ndia was not an authority for construction of
the statute% !i?. $nterest *ct% 1&;. $ts functions were confined
only to the pro!isions of the Reser!e 0an1 of $ndia *ct and the
0an1ing Regulation *ct and not any other statute. $t further
obser!ed that the Reser!e 0an1 of $ndia could not ha!e
interpreted the pro!isions of the $nterest *ct nor thereby could
ha!e empowered the ban1s to charge something more from
the borrowers by the process of rounding up of interest.
Iltimately% the -upreme #ourt dismissed the appeals% holding
that the appellants and the Reser!e 0an1 of $ndia% with a !iew
to touching the end of their own shadows in the guise of
eDercise of their contractual powers !is8a8!is the 0an1ing
Regulation *ct% eDceeded their jurisdiction in reco!ering the
taD imposed on them by way of interest under the
Parliamentary *ct. This decision of the -upreme #ourt is
sought to be relied upon to fortify the submissions can!assed
on behalf of the petitioner that in the present case also the
Reser!e 0an1 of $ndia could not ha!e issued direction in the
form of a +aster #ircular relating to Ewillful defaultF and
Ewillful defaultersF. *ccording to the petitioners% such policy
Page 153 of 162
decision of the Reser!e 0an1 of $ndia is beyond the scope of its
powers under the 0an1ing Regulations *ct and the Reser!e
0an1 of $ndia *ct. We are afraid% we are unable to understand
how this decision of the -upreme #ourt is helpful to the
petitioners. The -upreme #ourt too1 the !iew that the
Reser!e 0an1 of $ndia should not ha!e underta1en any
eDercise under the $nterest *ct% 1&;. The functions of the
Reser!e 0an1 of $ndia are confined only to the pro!isions of
the Reser!e 0an1 of $ndia *ct and the 0an1ing Regulations *ct
and not any other statute. We ha!e already eDplained in detail
that the +aster #ircular is in eDercise of the powers under the
Reser!e 0an1 of $ndia *ct and the 0an1ing Regulation *ct and
not any other statute with which the Reser!e 0an1 of $ndia is
in no way concerned. Thus% this decision is also% in no manner%
helpful to the petitioners.
$n the case of 6irectorate of Re!enue 9supra:% the
-upreme #ourt was dealing with a matter relating to the
7arcotic 6rugs K Psychotropic -ubstances *ct% 1&='. The
-upreme #ourt% in !iew of the few draconian pro!isions under
the *ct% considered the right to pri!acy as embodied in *rticle
21 of the #onstitution of $ndia. The -upreme #ourt was
considering the pro!isions of -ections 2 and 3 of the *ct%
1&='% which empowered the officers under the *ct to ma1e
search and sei?ure of a person at all hours and at all places.
#onsidering the draconian pro!isions which may lead to a
harsh sentence% the -upreme #ourt eDplained the doctrine of
Edue processF as adumbrated under *rticle 21 of the
#onstitution of $ndia which re"uires stri1ing of balance
between the need of law and enforcement thereof% on the one
hand% and protection of a citi?en from oppression and injustice%
Page 154 of 162
on the other. The -upreme #ourt% while interpreting the
pro!isions of -ections 2 and 3 of the *ct% 1&='% obser!ed
that the interpretation which directs a balance between the
enforcement of law and protection of the !aluable human
rights of the accused must be resorted to. * balance% thus%
must be struc1 in regard to the mode and manner in which the
statutory re"uirements are to be complied with !is8a8!is the
place of search and sei?ure. This decision of the -upreme
#ourt has been relied upon only with a !iew to highlight the
doctrine of Edue processF. *ccording to the petitioners% in the
case at hand% the elements of the doctrine of Edue processF is
missing. The manner and the mode of in"uiry at the end of
the ban1 itself could not be termed as a Edue processF. We
are afraid% this decision is also of no assistance to the
petitioners. The aspect of the doctrine of Edue processF has
been well eDplained by us in the earlier part of our judgment.
$n the case of Ramprasad 7arayan -ahi 9supra:% the
-upreme #ourt considered the prayer for a writ in the nature of
mandamus% directing the opposite party not to ta1e any action
under an *ct passed by the 0ihar Legislati!e *ssembly in 1&'(
and 1nown as the E-athi Lands 9Restoration: *ctF which was
challenged as !oid and unconstitutional. Ais Lordship Patanjali
-hastri% #./. 9as Ais Lordship then was: in a concurring
judgment obser!ed that the dispute was purely between
pri!ate parties and the matter for determination by duly
constituted courts to which it is entrusted% in e!ery free and
ci!ili?ed society% the important function of adjudicating on
dispute legal rights% after obser!ing the well established
procedural safeguards which includes the right to be heard%
the right to produce witnesses and so for. Ais Lordships
Page 155 of 162
obser!ed that such was the protection which the law
guaranteed e"ually to all persons% and the #onstitution
prohibited by *rticle 1 e!ery -tate from denying such
protection to anyone. Ta1ing clue from such obser!ations
made by the -upreme #ourt% it is sought to be contended in
the present case that ha!ing regard to the nature of the
in"uiry% more particularly the mode and the manner% it could
not be said that the interest of the borrower is well protected.
We are afraid% this decision is also of no assistance to the
petitioners. The obser!ations of the -upreme #ourt referred to
abo!e were altogether on a different factual conteDt.
$n +>s.*8)ne +ega +art P. Limited 9supra:% a 6i!ision
0ench of the Punjab and Aaryana Aigh #ourt was considering
the challenge to the orders passed by the A6<# 0an1 rejecting
the re"uest of the petitioner for selling the mortgaged property
under -ection 13913: of the -ecuritisation and Reconstruction
of <inancial *ssets and @nforcement of -ecurity $nterest *ct%
2((2. * preliminary objection was raised on behalf of the
respondents as regards the maintainability of the writ petition
against a pri!ate ban1. $n support of such preliminary
objection% reliance was placed on the decision of the -upreme
#ourt in the case of <ederal 0an1 Limited 9supra:. The 6i!ision
0ench o!erruled the objection as regards the maintainability of
the petition and too1 the !iew that the petition was
maintainable e!en against a pri!ate ban1. The 6i!ision 0ench
considered !arious decisions of the -upreme #ourt on the
subject. Aowe!er% what weighed with the 6i!ision 0ench in
ta1ing the !iew that a petition against a pri!ate ban1 would be
maintainable was that under -ection 1; of the -*R<*@-$ *ct%
an appeal would lie to the 6ebts Reco!ery Tribunal against the
Page 156 of 162
action of the ban1% and against any order passed thereunder%
an appeal is maintainable under -ection 1= of the said *ct to
the 6ebts Reco!ery *ppellate Tribunal. The #ourt too1 the
!iew that an order passed by the 6R*T is amenable to the writ
jurisdiction of a Aigh #ourt. The #ourt also considered -ection
3 of the -*R<*@-$ *ct% which is significant in deciding the
issue relating to the writ jurisdiction of a Aigh #ourt. -ection 3
bars the jurisdiction of a ci!il court in matters relating to
actions where pro!isions of the -*R<*@-$ *ct ha!e been
in!o1ed. The 6i!ision 0ench of the Punjab and Aaryana Aigh
#ourt too1 the !iew that the #onstitution guarantees e"uality
and stri1es against any arbitrary action of an authority. $t
further obser!ed that it could not be said that where!er any
authority acted in a discretionary or unreasonable manner% the
aggrie!ed party would be without any remedy either by way of
a ci!il suit or by in!o1ing the writ jurisdiction of a Aigh #ourt. $n
such circumstances% the #ourt too1 the !iew that it could not
be held that an action by the -cheduled ban1% to which the
pro!isions of the -*R<*@-$ *ct were applicable and had been
in!o1ed by it% would be immune from the eDtraordinary writ
jurisdiction of that court. We are afraid% this decision of the
Punjab and Aaryana Aigh #ourt is also of no assistance to the
petitioners. We are not concerned with a case wherein any
action is ta1en or proposed to be ta1en under the -*R<*@-$
*ct. The circular of the Reser!e 0an1 of $ndia does not say that
any decision as regards the declaration of willful defaulters will
not be open to challenge before the ci!il court. There is no bar
so far as the jurisdiction of ci!il court is concerned.
$n *peD @lectricals Limited 9supra:% a learned -ingle /udge
of this #ourt had the occasion to consider an identical issue as
Page 157 of 162
regards the maintainability of a writ application against a
pri!ate ban1. $n the said case% it was the $#$#$ 0an1 Limited
against whom writ was prayed for by the petitioners. $t was in
conteDt with the pro!isions of the -*R<*@-$ *ct that the
learned -ingle /udge too1 the !iew that a writ petition was
maintainable against a pri!ate ban1 li1e $#$#$ 0an1 to
challenge any illegal action of the ban1 while ta1ing steps
under -ection 139: of the -*R<*@-$ *ct. This decision also% in
our opinion% is of no assistance to the petitioners.
The -upreme #ourt% in the case of 5o!ernment of
Garnata1a !. 5owramma% reported in *$R 2((= -# =43% has
pointed out Oin paragraph 1(P that #ourts should not place
reliance on decisions without discussing as to how the factual
situation fits in with the fact situation of the decision on which
reliance is placed. )bser!ations of #ourts are neither to be
read as @uclids theorems nor as pro!isions of the statute and
that too ta1en out of their conteDt. The following obser!ations
in paragraphs 12 and 13 of the said judgment are rele!ant%
and are "uoted below,8
($. !ircumstantial flexibility' one additional or different
fact may make a world of difference between conclusions
in two cases. /isposal of cases by blindly placing reliance
on a decision is not proper.
(5. :he following words of Kord /enning in the matter of
applying precedents have become locus classicus-
7ach case depends on its own facts and a close
similarity between one case and another is not
enough because even a single significant detail may
alter the entire aspect' in deciding such cases' one
should avoid the temptation to decide cases 6as said
by !ordoOo. by matching the colour of one case
against the colour of another. :o decide therefore' on
Page 158 of 162
which side of the line a case falls' the broad
resemblance to another case is not at all decisive.
XXX XXX XXX
recedent should be followed only so far as it marks
the path of justice' but you must cut the dead wood
and trim off the side branches else you will find
yourself lost in thickets and branches. 2y plea is to
keep the path to justice clear of obstructions which
could impede it.
To sum up% our final conclusion is as under ,
91: The Reser!e 0an1 of $ndia was within its powers to
issue the +aster #ircular relating to the willful default
and willful defaulters as it is empowered to regulate the
ban1ing system and certain regulatory functions ha!e
been assigned to it by the pro!isions of the Reser!e 0an1
of $ndia *ct% 1&3% and the 0an1ing Regulations *ct%
1&&.
92: The +aster #ircular has been issued by the Reser!e
0an1 of $ndia in public interest. *lthough it has not been
stated in so many words to ha!e been issued in public
interest and also the source of power% yet if the source of
power is traceable% eDercise of such power cannot be set-
aside merely because the same has not been disclosed.
93: The +aster #ircular does not suffer from the vice of
impermissible delegation of a legislati!e power. $t
confirms eDactly to the power granted.
9: The +aster #ircular has the force of law and could
Page 159 of 162
be termed as a statutory circular.
9': The application of the maDim Enemo judex in causa
sua on the part of the petitioners on the premise that
the ban1 itself will be a judge in its own cause is
completely misplaced. $n a gi!en case% if the court finds
the action to be tainted with malafide or bias% then the
same could always be condemned and set at right. )n
mere apprehension of misuse of such pro!ision% an
otherwise !alid statute% should not be struc1 down or
condemned. * mere possibility or li1elihood of abuse of
power does not ma1e the pro!ision ultra vires or bad in
law.
94: The +aster #ircular does not impose an
unreasonable restriction upon the
promoters>entrepreneurs% being !iolati!e of the *rticle
1&91:9g: of the #onstitution of $ndia as it has the effect of
debarring them from a!ailing of any additional facilities
for floating a new !enture for a period of fi!e years from
the date the name of the willful defaulter is published in
the list of Ewillful defaultersF by the Reser!e 0an1 of
$ndia.
9;: The +aster #ircular% so far as it is sought to be
made applicable to all the directors of the company% is
arbitrary and unreasonable. To this limited eDtent% we
declare that part of the +aster #ircular as ultra vires the
powers of the Reser!e 0an1 of $ndia and is !iolati!e of
*rticle 1&91:9g: of the #onstitution of $ndia. Aowe!er% as
held in sub8para 94: abo!e% these obser!ations will not
Page 160 of 162
apply to the promoters> entrepreneurs.
9=: The +aster #ircular see1s to paint all the directors
with the same brush. The pro!isions in the circular
shatter the concept of identity of a company being
different and distinct from its directors without pro!iding
any safeguards.
9&: The show-cause notice issued to the petitioners of
-pecial #i!il *pplication 7o.4' of 2(1 is held to be bad
as it is bereft of the basic details and material particulars.
91(: The -tandard #hartered 0an1 although has been
included as one of the -cheduled 0an1s in the -econd
-chedule to the Reser!e 0an1 of $ndia *ct% 1&3% yet%
being a pri!ate ban1% is not amenable to the writ
jurisdiction of this #ourt. +erely because a company is
carrying on the ban1ing business% it cannot per se
become a public authority nor can be considered as
discharging public functions.
<or the foregoing reasons% the -pecial #i!il *pplication
7o.4' of 2(1 is partly allowed. The show-cause notices
issued by the Punjab 7ational 0an1 dated 1&
th
<ebruary 2(13%
1
th
+ay 2(13 and =
th
/anuary 2(1 respecti!ely are "uashed
and set-aside. $t will be open for the Punjab 7ational 0an1 to
proceed in accordance with law after issuing a !alid show-
cause notice to the petitioners.
The -pecial #i!il *pplication 7o.1(12( of 2(1 is partly
allowed to the eDtent that the inclusion of all directors in the
+aster #ircular is !iolati!e of *rticle 1&91:9g: of the
Page 161 of 162
#onstitution of $ndia.
-o far as the grie!ance of the petitioners of the -pecial
#i!il *pplication 7o.1(12( of 2(1 as regards the legality and
!alidity of the notice is concerned% it cannot be gone into as we
ha!e ta1en the !iew that the -tandard #hartered 0an1 being a
pri!ate ban1 is not amenable to the writ jurisdiction of this
#ourt. Aowe!er% it would be open for the petitioners to see1
appropriate legal remedy before the appropriate forum in
accordance with law. 7o costs.
*fter the order is pronounced% our attention has been
drawn by +r.-helat% the learned ad!ocate appearing on behalf
of the petitioner that in -pecial #i!il *pplication 7o.1(12( of
2(1 there is an interim order operating as on today
restraining the ban1 from ta1ing any further decision pursuant
to the show cause notice issued earlier. +r.-helat prays for
eDtension of the interim order passed earlier. $n the facts and
circumstances of the case% the interim order to the effect that%
if any decision is ta1en by the ban1 on the basis of the two
notices dated 2(th /une 2(1 the same would not be gi!en
effect to for a period of fortnight% shall continue for a period of
four wee1s from today.
-d>8
(AKIL KURESHI, J.)
Sd/-
(J.B.PARDIWALA, J.)
MOIN
Page 162 of 162

Gujarat High Court Wilful Default Case

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C/SCA/645/2014 CAV JUDGEMENT

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

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