RBI Not Bound To Hear Bank Board Before Supersession U/S 36AAA Banking Regulation Act: Kerala HC

The Kerala High Court on Friday, 3 July, held that the Reserve Bank of India (RBI) is not required to provide a prior hearing before superseding the board of directors of a co-operative bank under Section 36AAA of the Banking Regulation Act, 1949. However, it clarified that consultation with the State Government is mandatory before passing such an order.

Justice M.A. Abdul Hakhim considered a plea filed by the former President of the Irinjalakuda Town Co-operative Bank, M.P. Jackson, challenging an RBI order superseding the bank's elected Board of Directors and appointing an Administrator for one year. He observed:

“….it is clear that the Legislature in its wisdom has decided to avoid the application of the principle of natural justice to the proceedings under Section 36AAA. The Legislature has incorporated the principle of natural justice into the language of Section 36AA, whereas it has avoided the same in Section 36AAA. When the Legislature has decided to avoid the application of the principle of natural justice to the proceedings under Section 36AAA, it could not be read into the language of the said provision.”

The dispute arose after RBI inspected the bank and found several irregularities in its functioning, following which it imposed All-Inclusive Directions restricting the bank's operations. Jackson contended that the bank took steps to improve its financial position, including the proposed sale of non-banking assets. Despite this, RBI issued the supersession order.

Before the High Court, Jackson argued that RBI passed the order without granting a hearing, without mandatory consultation with the State Government, and without authority to displace a democratically elected Board of Directors. RBI, on the other hand, contended that Section 36AAA does not require a prior hearing and justified the supersession in light of the bank's financial condition.

Agreeing with RBI on the question of hearing, the Court observed that Section 36AA of the Banking Regulation Act expressly provides an opportunity of hearing for removal of managerial and other persons, while Section 36AAA contains no such requirement. It held:

“….it is clear that the Legislature in its wisdom has decided to avoid the application of the principle of natural justice to the proceedings under Section 36AAA. The Legislature has incorporated the principle of natural justice into the language of Section 36AA, whereas it has avoided the same in Section 36AAA. When the Legislature has decided to avoid the application of the principle of natural justice to the proceedings under Section 36AAA, it could not be read into the language of the said provision.”

Further, the Bench noted that RBI first inspected the bank and imposed regulatory restrictions on its operations, and then resorted to supersession thereafter. Since the supersession order recorded clear reasons, it held that the managing committee did not have a right to a prior personal hearing.

On the issue of consultation, however, itruled in favour of the petitioner and held that consultation with the Registrar alone did not satisfy the statutory requirement. It held:

“But when the statute specifically requires consultation with the State Government, the consultation with the Registrar of Co-operative Societies is not sufficient.”

It further added that “when the statute provides for consultation with the State Government, the absence of any objection from the side of State Government on the ground of non-consultation is irrelevant.”

At the same time, the Court rejected Jackson's contention that RBI lacked authority to supersede the elected board, holding that RBI has full powers under the Banking Regulation Act to intervene in the management of co-operative banks.

Despite finding fault with the consultation process, it declined to interfere with the supersession order. It noted that an Administrator had already managed the bank for nearly nine months and that restoring the earlier committee at that stage would not serve public interest or the interests of depositors.

Accordingly, the High Court dismissed the writ petition, while clarifying that RBI must follow proper consultation with the State Government if it seeks to continue the supersession beyond the existing term.

For Petitioner: Advocates Arjun Raghavan, T.R Harikumar and Pooja Pankaj

For Respondents: Senior Advocate Sumathy Dandapani, Advocates Millu Dandapani and Rajani K.N, Senior Government Pleader