Joseph Kuruvilla Vellukunnel vs The Reserve Bank of India

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 487 of 1961

Decision Date: 7 March 1962

Coram: M. Hidayatullah, Bhuvneshwar P. Sinha, J.L. Kapur, J.C. Shah, J.R. Mudholkar

The case titled Joseph Kuruvilla Vellukunnel versus The Reserve Bank of India and others was decided by the Supreme Court of India on 7 March 1962. The judgment was authored by Justice M. Hidayatullah, who was joined by Justices Bhuvneshwar P. Sinha, J. L. Kapur, J. C. Shah and J. R. Mudholkar. The petition was filed by Joseph Kuruvilla Vellukunnel and was sought against the Reserve Bank of India together with other respondents. The official citation for the decision is 1962 AIR 1371 and it also appears in the Supreme Court Reporter Supplement (3) 632. The case is referenced in several later citations, including R 1963 SC 1881, R 1964 SC 1279, RF 1966 SC 1953, RF 1967 SC 295, RF 1969 SC 707, RF 1981 SC 818, RF 1992 SC 1020 and RF 1992 SC 1033. The substantive issues concerned the constitutional validity of provisions in the Banking Companies Act, 1949 (10 of 1949), particularly sections 2, 35, 35A, 36 and 38, as well as sections 7, 8 and 38 of the Reserve Bank of India Act, 1934 (2 of 1934), and sections 433 and 450(2) of the Companies Act, 1956 (1 of 1956). The challenge was also raised under Articles 14 and 19(1)(f) and (g), 301 and 302 of the Constitution of India.

The headnote of the decision explained that subsection (1) of section 38 of the Banking Companies Act, 1949, provides that notwithstanding any provisions contained in sections 391, 392, 433 and 583 of the Companies Act, 1956, the High Court shall order the winding‑up of a banking company when an application for winding‑up has been made by the Reserve Bank under section 37 of the same Act. Section 38(b)(iii) further authorises the Reserve Bank to make such an application if, in its opinion, the continuance of the banking company is prejudicial to the interests of its depositors. Acting under the powers conferred by both the Banking Companies Act, 1949 and the Reserve Bank of India Act, 1934, the Reserve Bank periodically inspected the Palai Central Bank Ltd. and repeatedly warned the bank that its business practices were detrimental to depositor interests. In June 1960 a panic induced a run on several branches of the Palai Bank. The Reserve Bank concluded that the bank was unable to meet its depositor claims in full and that its continued operation would be harmful to depositors. Consequently, on 8 August 1960 the Reserve Bank filed an application before the High Court of Kerala under section 38(3)(b)(iii) of the Banking Companies Act, 1949, read with the Companies Act, 1956, seeking the winding‑up of Palai Central Bank Ltd. After hearing arguments from the Reserve Bank, the Palai Bank and the creditors, the High Court granted the application and ordered the winding‑up of the Palai Central Bank. This order subsequently became the subject of the petition before the Supreme Court, which examined the statutory framework and the constitutional challenges raised against the winding‑up provisions.

Opponents of the Reserve Bank’s petition argued that sections 38(1) and 38(3)(b)(iii) of the Banking Companies Act were inconsistent with Articles 14 and 19(1)(f) and (g) of the Constitution, and therefore void. They contended that the provisions allowed discrimination because they prescribed a different winding‑up procedure for a banking company than for any other company. They further argued that the provisions imposed an unreasonable restriction on the right to carry on banking business. In addition, the opponents maintained that the procedure denied the principles of natural justice by depriving banks of access to the courts. They compared the procedure under section 433 of the Companies Act, 1956, where the High Court had to be satisfied after a fair trial that winding up was justified, where the company could show cause, and where an appeal was permitted, with the procedure under section 38 of the Banking Companies Act, 1949. Under the latter, the Reserve Bank acted as the sole authority to decide whether a bank’s affairs were prejudicial to depositors, and the court was obliged to order winding up once the Reserve Bank’s application was made. The challengers also claimed that sections 38(1) and 38(3)(b)(iii) were ultra vires because they conflicted with Article 301 of the Constitution.

The Court rejected those submissions. It held, with the judgment of Kapur and Shah, that sections 38(1) and 38(3)(b)(iii) of the Banking Companies Act did not offend Articles 19(1)(f) and (g) and were constitutionally valid. The Court emphasized the historical role of the Reserve Bank as the central bank of India, its function as a banker’s bank, its control over banking companies, its authority to issue and cancel licences, and its many other powers. In that context, a law empowering the Reserve Bank to decide on the winding up of an unsafe banking company in the interest of depositors could not be characterized as unreasonable. Even if a court were called upon to act, it would normally be guided by the Reserve Bank’s opinion. The Court recognized that legislation may, for reasons of expediency, entrust the determination of specialised matters to an expert body, and such delegation is justified. However, the Court cautioned that exclusion of courts should not be presumed lightly. Further, with the judgment of Sinha, C.J., Hidayatullah and Mudholkar, the Court observed that while ordinary companies dealt with shareholders’ money, banking companies dealt with depositors’ funds and therefore required distinct regulation. The Reserve Bank’s statutory power and duty to supervise banking companies established a valid classification, so sections 38(1) and 38(3)(b)(iii) did not violate Article 14. The Court also held that the provisions did not transform a judicial process into an executive action; they merely required the court to consider the decision of an external agency before proceeding. Finally, the Court concluded that the provisions were not in breach of Article 301 because they served the public interest and were protected by Article 302.

The Court observed that the Reserve Bank of India possessed the statutory authority and the duty to monitor the affairs of every banking company in order to safeguard depositors’ money. Because of this distinct role, banking companies formed a separate class from ordinary companies, which justified a different regulatory treatment. Consequently, sections 38(1) and 38(3)(b)(iii) of the Banking Companies Act did not violate Article 14 of the Constitution, since the classification was reasonable and related to the purpose of protecting depositors. The Court further held that those provisions did not transform a judicial process into an executive action. Rather, the statutes required the court to take its guidance from the decision of an external agency—the Reserve Bank—and only after that guidance did the judicial proceedings commence. Moreover, the Court found that sections 38(1) and 38(3)(b)(iii) were not in conflict with Article 301 of the Constitution, because they were enacted in the public interest and enjoyed protection under Article 302.

In a separate opinion delivered by Justices Kapur and Shah, the Court examined Section 33 of the Banking Companies Act, 1949, and declared it to be an unreasonable restriction on a banking company’s right to conduct its business, rendering the provision unconstitutional. The defect in the impugned provision lay in two respects: first, the power granted to the Reserve Bank to apply to the High Court for a winding‑up order was exercised solely on the Reserve Bank’s subjective satisfaction that the conditions specified in the section existed; second, the law obliged the High Court to grant the winding‑up order without ever being required to inquire whether those conditions were in fact present. The Court reasoned that a law which imposes restrictions on a citizen’s fundamental right based on the subjective satisfaction of an expert body, thereby permanently depriving the citizen of property or liberty, is wholly unreasonable. The Court referred to earlier authorities—A.K. Gopalan v. State (1950) S.G.R. 88, State of Madras v. Rao (1952) S.C.R. 597, The Commissioner of Hindu Religious Endowments, Madras v. Sri Lakshmindra Tirtha Swamiar of Sri Shirur Muth (1954) S.C.R. 1005, Mahant Sri Jagannath Ramanuj Das v. State of Orissa (1954) S.C.R. 1046 and Virendra v. State of Punjab (1958) S.C.R. 308 in support of this view. The judgment concerned Civil Appeal No. 487 of 1961, filed by special leave against the Kerala High Court order dated 5 December 1960 in Banking Companies Petition No. 11 of 1960, and also entertained a petition under Article 32 for the enforcement of fundamental rights. Counsel for the appellant and petitioner included senior members of the Bar, while the respondents were represented by the Attorney‑General of India, the Additional Solicitor‑General, and other designated counsel. The judgment was delivered by Chief Justice B.P. Sinha, Justice M. Hidayatullah and Justice J.R. Mudholkar.

In this matter the Court recorded that the judgment of Justice Hidayatullah was delivered by Justice Hidayatullah, while the judgment of Justices J. L. Kapur and C. Shah was delivered by Justice Kapur. The factual background began with an application made by the Reserve Bank of India on 8 August 1960 in the High Court of Kerala. The application was filed under section 38 of the Banking Companies Act, 1949 (Act 10 of 1949) read together with the Companies Act, 1956 (Act 1 of 1956). In the application the Reserve Bank sought an order for the winding up of the Palai Central Bank, Ltd., a company whose registered office was situated at Palai in the State of Kerala. The Reserve Bank also requested that the Official Liquidator of the High Court be appointed as the liquidator with all the powers conferred by the two statutes, and that the same Official Liquidator be appointed as provisional liquidator for the period while the winding‑up application was pending. The High Court granted the relief sought on 5 December 1960, and the present appeal, granted special leave, was filed against that order. The appellant bank, referred to in the judgment as Palai Central Bank, Ltd. or simply the Palai Bank, had been incorporated in January 1927 under the Travancore Companies Regulations. Until 1936 the company operated under the name “The Central Bank, Ltd.” before the name was changed to Palai Central Bank, Ltd. In March 1937 the bank was listed in the Second Schedule to the Reserve Bank of India Act, 1934 (Act 2 of 1934). The bank’s balance sheet for the financial year ended 31 December 1959 showed a paid‑up capital of Rs 24,89,639.53. Its authorised capital stood at Rs 40 lakhs, divided into 1,60,000 equity shares of Rs 25 each. Over the succeeding decades the bank expanded its operations dramatically. While deposits amounted to only Rs 77,000 in 1928, by 1960 they had risen to almost Rs 10 crore. The bank had become the leading banking institution in the State of Kerala and was ranked fifteenth in the whole of India. At the time of the appeal it operated twenty‑five branches both within Kerala and beyond its borders. When Kerala was classified as a Part B State, the Reserve Bank of India Act was extended to that territory, bringing the Palai Bank under the supervision of the Reserve Bank. Exercising the powers granted to it by both the Banking Companies Act and the Reserve Bank of India Act, the Reserve Bank carried out periodic inspections of the bank in 1951, in July 1953, during February–March 1956, in March 1958 and again in January–February 1960. Each inspection revealed various irregularities, and the Reserve Bank issued special directions to remedy them. The principal defects identified were that the advances granted by the bank were not sound, with a large proportion being either irrecoverable or “sticky” (that is, not readily recoverable); that the income reported by the bank included a substantial amount of unrealised interest on these advances; that large loans had been extended to the bank’s directors, their relatives and companies in which they had interests, often without any security or with inadequate security; and that the bank declared dividends based on profit calculations that failed to make adequate provision for bad and doubtful debts and by

The Reserve Bank observed that the bank was issuing reserves at an alarming rate while its deposits were falling. Initially, the Reserve Bank responded by prohibiting the bank from granting any further advances to directors, their relatives, or any individuals, firms or companies in which the directors had an interest. It advised the bank to reduce clean advances and to regularise other advances, and warned that the bank’s business was being conducted in a manner detrimental to the interests of its depositors. The Reserve Bank further indicated that, if its directions were not complied with, it would invoke the first proviso to sub‑section (2) of section 22 of the Banking Companies Act by issuing a notice that a licence could not be granted to the bank.

Correspondence placed on record shows that after each subsequent inspection the Reserve Bank remained unsatisfied that the situation had improved; rather, it believed the condition had deteriorated and that the bank had failed to implement the directions. The bank denied these allegations, but the Court noted that no allegation of mala‑fide conduct was now made against the Reserve Bank, so the correctness of the parties’ claims was irrelevant to the present considerations.

Following the inspection conducted in February–March 1956, the Reserve Bank reported that as of 31 December 1955 the bank’s advances amounted to Rs 355.02 lakhs, of which Rs 171.27 lakhs were irrecoverable, and that the bank’s deposits had been impaired by Rs 139.13 lakhs. The Reserve Bank further stated that the bank failed to meet the requirements of the Banking Companies Act, specifically section 11 concerning the minimum paid‑up capital and reserves, and sections 22(3)(a) and (b) relating to the ability to pay depositors in full and to conduct affairs without harming depositor interests. It also found non‑compliance with sections 42(6)(a)(i) and (ii) of the Reserve Bank of India Act.

At that stage, the Reserve Bank deputed an observer, issued additional directions, and warned that it would remove the name of the Palai Bank from the Second Schedule of the Reserve Bank of India Act if the directions were not faithfully and promptly executed. Throughout this period, the Reserve Bank consistently required the Palai Bank to submit statements and returns.

The inspection carried out in March‑May 1958 revealed a still worse situation as of 28 February 1958. Although deposits had increased, advances had risen to Rs 421.56 lakhs, of which Rs 208.05 lakhs were deemed irrecoverable. In the Reserve Bank’s assessment, after writing off the paid‑up capital, reserves and related items amounting to Rs 41.17 lakhs, deposits totalling Rs 177.24 lakhs were impaired. Further directions were issued, and the bank was again warned that it was conducting its affairs in a manner detrimental to the interests of its depositors.

In the examination conducted during January and February 1960, the Reserve Bank reported that as of 31 December 1959 the bank’s advances totaled Rs 529 lakhs, of which Rs 218.51 lakhs were classified as irrecoverable, Rs 17.71 lakhs as doubtful, and Rs 111.57 lakhs as frozen or sticky. On 21 July 1960 the Reserve Bank sent a letter containing the warnings previously issued to the bank and indicated that the bank appeared to have become indurated; the letter also granted the bank twelve months to rectify the situation and thirty days to respond to the inspection report. An officer of the State Bank of India, identified as Mr Sivaraman, had already been appointed as the General Manager of the bank and had taken charge on 1 July 1960. On 23 June 1960 the bank’s balance sheet for the date 31 December 1959 was published, showing a loss of Rs 14.5 lakhs. The Reserve Bank alleged that losses had been recorded in earlier years but had been concealed. In June 1960 a run occurred on several branches of the bank; it is difficult to determine whether the run was triggered by the publication of the loss‑showing balance sheet or by the appointment of Mr Sivaraman. Between 24 June 1960, when deposits stood at Rs 9.82 crores, and 22 July 1960, when deposits fell to Rs 9.32 crores, withdrawals amounted to Rs 50 lakhs. By 3 August 1960, deposits had declined to Rs 8.50 crores, and an additional Rs 82 lakhs was withdrawn in the preceding twelve days. To meet the demand for cash, the bank borrowed against its government securities, thereby pledging all securities except those valued at Rs 25 lakhs. The composition of the Rs 8.50 crores of deposits was Rs 4 crores in fixed deposits, Rs 2.25 crores in current accounts, and Rs 2.25 crores in savings deposits. The Reserve Bank’s assessment found that the bank possessed cash of Rs 50 lakhs and could borrow up to Rs 1 crore against its securities. The appellant argued that the General Manager’s report dated 8 November 1960 showed cash in hand of Rs 42.18 lakhs, bank balances of Rs 83.68 lakhs, marketable securities of Rs 22.98 lakhs, and an estimated surplus from specifically pledged assets of Rs 142.63 lakhs; however, these amounts did not indicate that all the funds would be immediately available to stem the run. Consequently, it was evident that if the run persisted, depositors who managed to withdraw their money would receive full payment, while the remaining depositors would receive little or nothing. The bank’s affidavits asserted that the run was subsiding, whereas the Reserve Bank contended that it continued unabated; irrespective of whether it was abating or ongoing, the bank’s reputation and security had been severely undermined. The learned Company Judge, in the judgment appealed against, estimated that the sudden withdrawals amounted to approximately Rs 158 lakhs, roughly one‑sixth of the total deposits.

It was recorded that sudden withdrawals from the Palai Bank amounted to Rs 158 lakhs, which represented roughly one‑sixth of the total deposits held by the bank. In response to the mounting pressure, the directors of the Palai Bank dispatched Mr Sivaraman to Bombay in early August 1960 for urgent consultations. After completing his discussions, Mr Sivaraman returned and, on the 8th of August, announced that an application for the winding up of the bank had been filed on that same day and that a provisional liquidator had been appointed. Acting on this development, he issued orders directing all the branches of the bank to cease business operations and to close their doors. The Reserve Bank of India expressed the view that the Palai Bank was not in a position to pay its depositors in full and that allowing the bank to continue operating would be prejudicial to the interests of those depositors. The application for winding up, as already noted, was filed on 8 August 1960 and was subsequently heard by Justice Raman Nayar. Justice Nayar proceeded without giving notice under section 450(2) of the Companies Act before making the order appointing the provisional liquidator. Nevertheless, he did issue a notice of the main application, heard the arguments of the Reserve Bank, the Palai Bank, the creditors who supported the petition, and the creditors who opposed it, and examined several affidavits that had been filed by the parties. On 5 December 1960, Justice Nayar accepted the application of the Reserve Bank and ordered that the Palai Bank be wound up. The appellant, who was a former director of the Palai Bank and also a contributor, sought a certificate under article 13(1) of the Constitution, but the judge declined to certify the case. Consequently, the appellant obtained special leave to appeal to this Court and filed the present appeal. Additional parties applied to intervene in the appeal, and they were permitted to be heard. One such intervenor, Mr D Chacko Kappon, who was both a contributor and a depositor, filed a petition under article 32 of the Constitution; that petition was heard together with the appeal, and this judgment will dispose of both the appeal and the writ petition. In the proceedings before the High Court, the Reserve Bank’s application was challenged on two grounds. The first ground alleged that the Reserve Bank’s action in filing the winding‑up application was mala fide; this allegation was abandoned in the High Court and was not raised before this Court. The second ground contended that section 38(3)(b)(iii) of the Banking Companies Act, 1949, was void because it violated articles 14 and 19 of the Constitution, and article 301 was also invoked during the hearing. The High Court dismissed the Bank and the other answering respondents, and only the constitutional ground was pursued before us. Although the factual background does not play a decisive role in the remaining question of law, the facts narrated above were presented by the Attorney‑General to illustrate the context of the Reserve Bank’s action. In his reply, the appellant referred to additional facts in order to avoid any possible prejudice to his case that might arise if only the Reserve Bank’s version of the facts were considered.

The Court stated that it was not obliged to express an opinion on the correctness of the allegations and counter‑allegations, but it considered it necessary to set out briefly some of the facts highlighted by the appellant so that the rival contentions were kept in mind while determining the validity of the statutory provision. The appellant argued that the Reserve Bank’s earlier inquiries had not been thorough; nevertheless, the winding‑up application submitted by the Reserve Bank contained specific details of the advances and their realizability. The Court was referred to a reply issued by the Reserve Bank in response to four compromise schemes proposed by Palai Bank between the bank and its creditors. In that reply the Reserve Bank observed that no definite opinion could be formed on the schemes except after a detailed examination of the bank’s books of account with a view to assessing the realizability of its assets and the probable pace of recovery of the realizable assets. The Court regarded this stance as proper, because by that stage the bank’s condition had materially altered and all earlier data had become outdated; the reply did not indicate that the Reserve Bank’s inspection was insufficiently thorough. The appellant further contended that the Reserve Bank’s estimate of cash and realizable assets was wrong, relying on the report of the Provisional Liquidator and the General Manager dated 8 November 1960. The Court had already referred in an earlier part of the judgment to the amounts that, in the respondents’ opinion, constituted the available assets, and had explained why the Reserve Bank could not be said to have erred. It was then asserted that the bank run was under control, and the Court’s attention was drawn to statements showing withdrawals during July and August presented in tabular form. The Court noted that the run did not follow a uniform course; at times withdrawals were greater, at other times lesser, but the pressure continued, which was the main point of the matter. It was further submitted that the Reserve Bank itself thought well of Palai Bank, since in 1954 it authorised the opening of a new branch at Madurai, and even in its final letter of 21 July 1960 it gave the bank one year to improve matters and thirty days to show cause against the inspection reports, yet proceeded with action before the thirty‑day period had expired. The Court observed that although the Reserve Bank’s action was taken during the grace period, after 21 July the situation had altered so radically that any further delay might have defeated the very purpose of the law under which the action was taken. Finally, the appellant contended that Palai Bank had begun as a rural bank making advances secured by land, and that such “sticky” security was capable of being realized.

The Court referred to the Report of the Travancore‑Cochin Banking Enquiry Commission, which had been appointed in 1956 to survey banking in the former Travancore‑Cochin State. That report observed that the banks in the State were dispersed throughout the rural interior and that their principal activity was to finance rural people engaged in small‑scale businesses such as crop raising, produce processing, transport and vending. It was contended that a rural bank of this sort could not be judged by the same standards that apply to a commercial bank and that the Reserve Bank of India should have allowed for the difficulty of realising advances secured by land, especially for the period before the Reserve Bank of India Act was extended to the area. The petitioners argued that, given time, those advances could have been recovered and that a genuine effort was under way, assisted by an adviser who had formerly been a senior‑grade officer of the Imperial Bank of India. The record showed that three accounts had been closed, twenty‑six accounts had been sued upon, and in thirteen cases substantial remittances had been received. While those facts might be true, the Court observed that it was futile to speculate on what might have happened had the depositors not rushed to withdraw their money. The Reserve Bank’s intervention had been prompted by the emergency created by the run, because the depositors were not prepared to wait for the bank to rebuild sufficient funds after recovering its advances. The Court noted that, as admitted, advances secured by land could not be realised as readily as those of a commercial bank secured by other collateral. If a rural bank attempted to conduct its business in the manner of a commercial bank, it must be judged by the same criteria, and the Court held that the affairs of Palai Bank had long ceased to be rural in character and had become those of a modern commercial bank. Consequently, the Court found that there was insufficient material to describe the Reserve Bank’s action as malicious or dishonest. Moreover, the forbearance shown by the Reserve Bank proved unwise and demonstrated the futility of granting additional time. The Court was not surprised that the respondents in the High Court and the appellant before this Court did not challenge the integrity of the Reserve Bank’s action. The remaining issue before the Court concerned the contention that sections 38(1) and 38(3)(b)(iii) of the Banking Regulation Act were void because they violated Articles 14 and 19 of the Constitution and were ultra vires, conflicting with Article 301. The arguments invoking Articles 14 and 19 were based on the same reasoning, although the argument under Article 19 considered a few additional facts. In short, the petitioners claimed that sections 38(1) and 38(3)(b)(iii) made the Reserve Bank the sole judge of whether a banking company’s affairs were prejudicial to depositors and thereby allowed the Reserve Bank to compel a winding‑up order without judicial oversight.

In order to determine whether the affairs of a banking company are being conducted in a way that harms the interests of its depositors, the Court has no discretion but to pass an order winding up the banking company when an application is filed. Section 38 of the Banking Companies Act sets out the procedure for such winding‑up. Sub‑section 38(1) states that, notwithstanding anything contained in sections 391, 392, 433 and 583 of the Companies Act 1956 and without prejudice to the powers conferred under sub‑section (1) of section 37 of the Banking Companies Act, the High Court shall order the winding up of a banking company (a) if the banking company is unable to pay its debts; or (b) if an application for winding up has been made by the Reserve Bank under section 37 or under this section. Sub‑section (2) provides that the Reserve Bank shall make an application for winding up a banking company if it is directed to do so by an order under clause (b) of sub‑section (4) of section 35. Sub‑section (3) allows the Reserve Bank to make an application for winding up a banking company if, in the opinion of the Reserve Bank, the continuance of the banking company is prejudicial to the interests of its depositors.

It is argued that the word “shall” in the first sub‑section imposes a mandatory duty on the High Court, compelling it to pass a winding‑up order whenever the Reserve Bank chooses to make an application. It is further contended that these powers bypass the safeguards provided by section 433 of the Companies Act, which governs the winding up of companies generally. The power conferred on the Reserve Bank by section 38 is said to violate Article 14 of the Constitution because it creates a classification between banking companies and other companies by prescribing a different legal regime for their winding up. The same power is also said to infringe Articles 19(1)(f) and 19(1)(g) as it imposes an unreasonable restriction on the right to hold property and the right to carry on business as a banking company.

To elaborate on the first point, it is argued that under section 433 of the Companies Act, when an application is made to wind up a company, the High Court must be satisfied after a fair trial that winding up is warranted. The judge, who is independent of executive control, is free to decide after the company has been given an opportunity to show cause, and there is a right of appeal against an adverse order. In contrast, the procedure prescribed in section 38 of the Banking Companies Act does not give the banking company any opportunity to show cause either before or after the winding‑up order. The Reserve Bank does not record or communicate any reasons in writing, there is no access to the Court, and no hearing is held before the Court to determine whether the proposed action is justified. Consequently, there is no mechanism for redress in case a mistake is made.

The petitioners submitted that any banking company may be suppressed either by the Reserve Bank of India or by the Central Government, and that the courts are rendered powerless because the opinion of the Reserve Bank or of the Central Government is not subject to judicial review and there is no provision for an appeal against a decision of the Reserve Bank or against a court decision made on the Reserve Bank’s application. They further argued that the law is unreasonable because the Reserve Bank does not function as an independent or impartial adjudicator; the members of both the Central and Local Boards are appointed by the Government and they do not enjoy security of tenure comparable to that of High Court judges. The petitioners pointed out that the Reserve Bank is required to act under directions issued by the Central Government, and that even if the Reserve Bank disagrees with a proposed winding‑up, it must nevertheless file an application for winding up a banking company when instructed to do so by the Central Government. In addition, they contended that the power conferred by the statute is draconian, describing it as uncanelised, uncontrolled and despotic, and that its exercise annihilates every principle of natural justice, eliminating the fundamental concept of resort to a court for adjudication. According to the petitioners, the law is so manifestly unreasonable that it amounts to a gross violation of all fundamental rights. They also argued that allowing the Reserve Bank to choose whether to proceed under the Companies Act or under the Banking Companies Act creates a further possibility of discrimination, and consequently maintained that section 38(1) of the Banking Companies Act cannot be sustained as a valid law on any principle. The learned Attorney‑General, appearing for the respondents, countered that the Reserve Bank’s action was fully supported by the facts. He explained that Palai Bank had been inspected repeatedly over a period of ten years, and that the inspection reports were provided to the bank not only for its information but also for it to give explanations and to comply with directions. He emphasized that, although the action may appear drastic, it was taken only after the bank had been given numerous opportunities to rectify the deficiencies, noting that as late as 1960 the Reserve Bank granted the bank a full year to improve. He added that immediate action became necessary because confidence among depositors had eroded, leading a large number of them to withdraw their money. The Attorney‑General further observed that many individuals had expressed the view that the Reserve Bank should have intervened earlier, and that, if any blame could be attached, it would be for any delay rather than for a hasty winding‑up. He urged that the Reserve Bank, and not the court, was best positioned to act promptly because it already possessed all the necessary information, and he asserted that the Reserve Bank’s statutory role as a responsible authority makes it the appropriate body to make such a decision.

According to the counsel for the respondent, the decision under consideration was of such gravity that it required immediate action by the Reserve Bank. He argued that, unless the Reserve Bank could be proved to have acted dishonestly – a circumstance that did not exist – its actions could not be questioned and should not be subjected to doubt. He further maintained that banking companies formed a distinct class and that the special legislation governing their winding‑up could not be described as discriminatory. In his view, the law governing the winding‑up of banks was neither discriminatory nor unreasonable, and a prior judicial determination on a similar issue was not a necessary condition before a winding‑up order could be issued against a bank. On the basis of these submissions, he urged that both the appeal and the petition be dismissed. Before examining the arguments of the parties in detail, the Court indicated that it would first set out a brief overview of the Reserve Bank’s role in India’s financial system and its position within the legal framework.

The Reserve Bank of India was created on 1 April 1935 by operation of the Reserve Bank of India Act, 1934. Long before its establishment, there had been repeated calls for a central banking institution in the country. The Royal Commission on Indian Currency and Finance, in its 1926 report, recommended that a central bank was essential for placing the nation’s currency and credit on a firm foundation. An initial bill introduced in 1927 by Sir Basil Blackett failed to become law. Subsequently, the Indian Central Banking Inquiry Committee, in its 1931 report, affirmed the necessity of a central bank to secure the development of India’s banking and credit system on a sound basis. The Committee noted that several provincial committees had also advocated for the creation of the Reserve Bank. It concluded that establishing a central or reserve bank was of supreme importance for the advancement of banking facilities and the nation’s economic development, and that such an institution would, by consolidating banking and currency reserves, increase the volume of credit available for trade, industry and agriculture while mitigating the adverse effects of seasonal credit shortages. The White Paper on Indian Constitutional Reforms further recommended that the Reserve Bank be free from political influence. In response to these recommendations, a new bill presented by Sir George Schuster on 8 September 1933 was passed and received the Governor‑General’s assent on 6 March 1934. The preamble of the Act set out the Bank’s primary functions as the regulation of the issue of bank notes and the maintenance of reserves with a view to ensuring monetary stability in India.

In order to secure monetary stability in India and to operate the country’s currency and credit system to its advantage, the Reserve Bank was required to be given additional powers so that it could function effectively as a central bank. To achieve this, the legislation granted the Reserve Bank the authority to hold the cash balances of important commercial banks. It also conferred upon the Reserve Bank the right and the obligation to transact Government business within India, and to enter into agreements with State Governments for the purpose of conducting their business. Further, the Act empowered the Reserve Bank to require every bank listed in the Second Schedule to maintain with the Reserve Bank a balance that was not less than five per cent of its demand liabilities and two per cent of its time liabilities. In addition to these statutory powers, the Reserve Bank performed the ordinary functions of a central bank as well as many functions of a regular commercial bank, although the latter were not described in the same detail as those typical of an ordinary bank. The most important function of the Reserve Bank, however, was identified as the general regulation of the banking system, leading to its characterization as a “Bankers’ Bank.” Under the Reserve Bank of India Act, scheduled banks were required to keep certain balances, and the Reserve Bank was authorized to lend to those banks as a lender of the last resort.

The Reserve Bank was also given a range of advisory and regulatory responsibilities. It acted as an agency for collecting financial information and statistics, and it advised the Government and other banks on matters relating to finance and banking. To fulfil this role, the Reserve Bank kept itself informed of the activities and monetary positions of both scheduled and other banks, inspected the books and accounts of scheduled banks, and, after such inspection, advised the Government whether a particular bank should be included in the Second Schedule. Every scheduled bank was required to send to the Reserve Bank and to the Central Government a weekly return of its position in a form prescribed by the Act, although on occasion the Reserve Bank permitted a bank to submit its returns on a monthly basis instead of weekly. From these returns, the Reserve Bank prepared and published consolidated statements showing the monetary position of the country. The inclusion of a bank in the Second Schedule was a function exercised by the Reserve Bank, and, pursuant to sections 42(6)(a)(iii) and (b)(ii), the Reserve Bank satisfied itself that the affairs of the particular bank were not being conducted in a manner detrimental to the interests of its depositors. The Reserve Bank also possessed the power to prohibit any scheduled bank from receiving fresh deposits after a week’s notice. This analysis of the provisions of the Reserve Bank of India Act demonstrates that the Reserve Bank was created as a central bank endowed with powers of supervision, advice and inspection over banks, particularly those seeking inclusion in the Second Schedule or those already scheduled.

The Court observed that the Reserve Bank of India performed a vital role in protecting the economy and maintaining the financial stability of the nation. It noted that the Board of the Reserve Bank was constituted of members who were nominated, and that, given the nature of the institution, such a method of selection could not be replaced by any other procedure. The Court stated that elections or competitive examinations would not be capable of ensuring that the Board consisted of individuals of proven worth and standing, and that no alternative method could plausibly be imagined. While the members of the Board were subject to removal, the Court remarked that merely providing for removal did not by itself guarantee integrity or efficiency, and it found no indication that the Reserve Bank had acted, in the present matter or in other matters, under pressure or from improper motives.

The Court then referred to a passage from the earlier decision in All India Bank Employees’ Association v. National Industrial Tribunal (1), quoting that “If it was not the Reserve Bank of India, the only other authority that could be entrusted with the function would be the Finance Ministry of the Government of India and that department would necessarily be guided by the Reserve Bank having regard to the intimate knowledge which the Reserve Bank has of the banking structure of the country as a whole and of the affairs of each bank in particular.” After restating the position of the Reserve Bank as derived from the Reserve Bank of India Act, the Court proceeded to examine the powers granted to the Reserve Bank under the Banking Companies Act. It observed that the Banking Companies Act, in its current form, was the result of numerous legislative enactments and that the Banks’ Liquidation Proceedings Committee (1962) had described the Act as being “made up of shreds and patches.” The Court acknowledged that the learned Attorney‑General had taken the Court through the entire evolutionary history of the legislation, but the Court decided that a detailed tracing of each step was unnecessary. Instead, it chose to highlight the salient milestones.

Accordingly, the Court explained that the Indian Companies Act, 1913, contained no special provisions for banking companies, particularly with respect to their winding‑up. Special provisions were later introduced by the Indian Companies (Amendment) Act, 1936, which added Part X‑A that dealt with certain regulatory matters but did not address the winding‑up of banking companies. The amendment was judged to have fallen short of its purpose, prompting the Reserve Bank of India to draft a bill as early as 1939, which eventually formed the basis of the present Banking Companies Act. The Court noted that during the war years, the Indian Companies Act underwent several amendments to meet special exigencies, although those changes were not the focus of the present discussion. By July 1946, it became apparent that undesirable features had emerged in banking practice. The Court described how banks were acquiring control of non‑banking companies and, through interlocking shareholdings, were able to manipulate the finances at their disposal. Among the main concerns were the granting of loans to persons connected with bank management without adequate security and extensive window‑dressing at the time of preparing balance‑sheets, which threatened the interests of depositors.

In this passage the Court observed that banks often prepared balance‑sheets in a manner that allowed them to use the bank’s funds in ways that harmed depositors. It emphasized that the Indian Companies Act of 1913 was principally designed to protect the interests of shareholders, while in a banking company the interests of depositors are usually far more important than those of shareholders, because the depositors’ money represents a different class of investment. The Court then recounted legislative measures introduced in 1946. An Ordinance consisting of six sections was enacted, of which sections three to six were operative. Section three authorised the Central Government to instruct the Reserve Bank of India to inspect any banking company’s books and accounts and to submit a report to the Government. Section four set out the machinery and procedures required to give effect to section three. Section five gave the Government power to forbid a bank from accepting new deposits, to direct the Reserve Bank not to list a particular bank in the Second Schedule, or to remove a bank that was already listed. Sub‑section two of that provision prescribed penalties for non‑compliance. Section six permitted the Central Government, after giving reasonable notice to the banking company concerned, to publish the whole report or excerpts thereof. The purpose of these provisions was to provide depositors with a degree of safety for their money. Following this Ordinance, Parliament enacted the Banking Companies (Restriction of Branches) Act, 1946, which, as its title indicates, curtailed the unrestricted opening of new branches by banks. To combat the problem of indiscriminate advances and loans, another Ordinance was issued in 1948, titled the Banking Companies Control Ordinance (XXV of 1948). That Ordinance provided that, on an application by the Reserve Bank, the Court would appoint the Reserve Bank as the official liquidator of a banking company. The Reserve Bank of India Act was also amended to allow the Reserve Bank to extend loans to a banking company, securing those loans with a first charge over the company’s assets in the event of winding up. The Court noted the massive wave of bank failures that occurred in the late 1940s. Between 1926 and 1937, twenty‑three banks had suspended payments; in 1938 and 1939, forty‑six banks failed; from 1940 to 1946, ninety‑five banks were affected; and in the years 1947, 1948 and 1949, a total of 123 banks collapsed, creating outside liabilities amounting to eighty‑two crore rupees, with the greatest concentration of failures—eighty‑three banks—in Calcutta. The winding‑up proceedings that followed revealed many unsatisfactory features. The Court observed that the amounts realised from asset sales were often trivial, while the costs of winding up were substantial and the process consumed an enormous amount of time. It explained that winding up any company, whether a bank or any other type of enterprise, requires a thorough investigation of the affairs, the recovery and realisation of assets, and the distribution of the realised proceeds. While these steps can be undertaken without undue haste, the Court emphasized that the decision whether to proceed with winding up a bank must not be unnecessarily delayed when the interests of depositors are at stake.

In this case the Court observed that a decision to wind up a banking company could not be postponed indefinitely when the protection of depositors was at stake. The Court explained that the Banking Companies Act was the only appropriate instrument to preserve the rights of depositors and to maintain confidence in banking operations, whether a bank was continuing its business or was unable to do so. It was noted that the Reserve Bank of India was already functioning as a central bank and exercised a certain degree of control over both scheduled and unscheduled banks. The Court said that the Banking Companies Act strengthened this control by inserting provisions expressly intended to safeguard depositors’ interests. The Court recognised that the differences between the Banking Companies Act and the Companies Act, which some had described as discriminatory, were justified by the distinct objectives each statute pursued. It emphasized that banking companies could not be treated in the same manner as ordinary companies. While ordinary companies handle the funds of shareholders, who own a share in the assets, appoint their own directors, and whose liability is limited, banking companies manage the money of depositors who have no security beyond the solvency and prudent conduct of the bank. Consequently, the Court held that banks must be regulated in a different way, with the interests of depositors being paramount, and that any winding‑up decision must consider the need to satisfy creditors as fully or as equitably as possible. The Court further explained that such action is guided not by speculative long‑term forecasts of a bank’s ability to meet its obligations, but by its present capacity to pay creditors. In this regard, the Banking Companies Act conferred upon the Reserve Bank both the power and the duty to monitor the affairs of every banking company so as to ensure the safety of depositors’ money. The Court described this classification of banks as reasonable, just, and practical for achieving the statute’s purpose. It added that it was unnecessary to analyse each provision of the Act in detail. When the Act was originally enacted, its principal objectives were to prescribe minimum capital standards, to prohibit non‑banking entities from accepting demand deposits, and to limit the payment of dividends. In addition, the Act introduced a comprehensive licensing scheme for banks and gave the Reserve Bank authority to require periodic returns and balance sheets, and to inspect the books and accounts of banking companies. Finally, the Act empowered the Central Government to take action against banks that acted detrimentally to the interests of depositors.

In discussing the provisions that allow for a quicker winding‑up of banking companies, the judgment noted that the Banking Companies Act of 1919 expressly contemplated the need for a special procedure because ordinary liquidation rules under the Indian Companies Act were unsuitable for banks. The Act’s explanatory note to clause 37, which aligns with section 38, explained that a bank’s business operates on an over‑the‑counter basis and therefore must meet its liabilities immediately. Consequently, the legislation provided that a bank could be wound up if it failed to satisfy a lawful demand within a prescribed period. The same note indicated that the Reserve Bank was given authority to seek liquidation of a banking company when its affairs were conducted to the detriment of depositors’ interests.

An examination of the Banking Companies Act, the Court observed, reveals two prominent features. First, the entire purpose of the Act is to protect the interests of depositors. Second, the Reserve Bank functions as the instrument through which that purpose is achieved. The Act repeatedly designates the Reserve Bank as the authority empowered to sanction, permit, certify, inspect, report, advise, control, direct, license and prohibit actions of banking companies. With very few exceptions—such as a rare right of appeal to the Central Government—the Reserve Bank’s judgment is final in matters concerning a banking company, making detailed reference to each specific section unnecessary.

The Court further explained that the Reserve Bank’s powers extend beyond the operational phase of a bank to situations where the bank wishes or is compelled to cease operations. If a banking company seeks a moratorium by applying to the High Court, that application is not maintainable unless it is accompanied by a report from the Reserve Bank stating that, in its opinion, the bank will be able to discharge its debts. Should the High Court grant a moratorium without such a report, it is required to obtain one from the Reserve Bank. The High Court must also consider the depositors’ interests, and even during a court‑granted moratorium the Reserve Bank retains the power to apply for winding up of the bank.

Sections 39 and 41‑A of the Act confer special winding‑up powers on the Reserve Bank. In a voluntary winding‑up, the Reserve Bank must certify that the bank can pay all its debts in full as they become due. When banks propose amalgamation, the scheme must receive the Reserve Bank’s approval. Likewise, any compromise or arrangement between a bank and its creditors must satisfy the Reserve Bank. In all such matters, the overarching consideration is the protection of depositors’ interests.

The judgment noted that when the Reserve Bank intervenes in matters concerning a banking company, any satisfaction that it requires must be directed toward protecting the interests of the depositors. In the specific situation where a banking company is being reconstructed after the Reserve Bank has applied for an order of moratorium, the Reserve Bank is required to satisfy its own criteria and to prepare a reconstruction scheme. That scheme, among other requirements, must be fashioned so as to safeguard the depositors’ interests. The Court then observed that a brief review of several other provisions of the Banking Companies Act, together with the general provisions previously discussed, clearly demonstrates that the legislature intended the Reserve Bank, given its role as the central bank and its attendant duties and obligations, to have a decisive voice in certain matters affecting banks. This legislative intent must be kept in mind while interpreting sections 38(1) and 38(3)(b)(iii) of the Act. The Court further emphasized that, in view of the unfortunate experiences of the past, the legislature was keen to establish a mechanism for the supervision, inspection and efficient operation of banking companies throughout the country. An associated objective was to enable the swift winding‑up of banks whose continued existence would be detrimental to depositors. Both of these goals were pursued through the special powers granted to the Reserve Bank, which placed it in a position to act promptly and effectively. To assist the Reserve Bank, the law required the courts to be guided, in certain respects, by the Reserve Bank’s opinion and judgment, and a distinct procedure for the disposal of winding‑up cases involving banks was codified in Part IIIA of the Banking Companies Act.

The Court then turned to the submissions advanced by the petitioner that sections 38(1) and 38(3)(b)(iii) of the Act are unconstitutional. The petitioner argued, first, that the provisions create an unjustifiable distinction between banking companies on the one hand and non‑banking companies on the other, and also discriminate among banking companies themselves. Second, the petitioner claimed that the provisions impose an unreasonable restriction on the constitutional right to carry on banking. Third, it was contended that the procedure established by the sections denies the principles of natural justice, chiefly by depriving aggrieved parties of access to the courts. Although the immediate relief sought was a declaration that the two provisions are void, the petitioner’s contentions extended to a wide range of constitutional issues. To support the first ground, the petitioner relied on Article 14 of the Constitution, and for the second and third grounds it invoked Articles 19(1)(f) and 19(1)(g). The Court observed that these arguments follow a well‑known line of reasoning that requires little further elaboration. Because there is no directly applicable decision of this Court or of any High Court on the precise issue, the petitioner sought guidance from earlier judgments of this Court that dealt with analogous statutes. In response, the learned Attorney‑General relied upon provisions of certain banking statutes in the United States and Japan, as well as decisions of American courts where similar statutes had been examined under the due‑process clause. The Court indicated that it would consider those foreign materials and the comparative rulings in the sequel.

The Court first examined the claim that the provisions creating a distinction between banking companies and non‑banking companies amounted to unlawful discrimination. It observed that the two classes of entities are fundamentally different in nature and purpose, and therefore require distinct statutory treatment. The Court noted that a special Committee, named the Banks’ Liquidation Proceeding Committee, had been constituted in 1952 to study the specific problems faced by banking institutions. The Committee’s findings and recommendations were subsequently enacted through amendments to the Banking Companies Act, one of which is the contested section now under review. Because the classification of banking companies is clear‑cut and grounded in the objective of achieving a particular regulatory goal, the Court held that the separate procedural regime cannot be described as discriminatory. It further explained that the existence of two parallel procedures—one under sections 38(1) and 38(3)(b)(iii) of the Banking Companies Act and the other under the Companies Act—does not create arbitrariness, since each procedure is applied to situations that warrant its specific safeguards. The Reserve Bank, the Court said, is a reasonable authority answerable to the Central Government, and its actions are subject to public scrutiny and oversight. Should the Reserve Bank act in bad faith, the Central Government and, ultimately, the courts have the power to intervene. Consequently, the Court concluded that the provisions of sections 38(1) and 38(3)(b)(iii) do not infringe Article 14 of the Constitution.

The Court then turned to the second and third sets of arguments, which rest on the same factual foundation. It first addressed the allegation that the Reserve Bank failed to provide a hearing, failed to record reasons in writing, and failed to communicate its decisions. In the present case, the Court found that the factual record disproved this contention. Over a period of nearly nine years, the Reserve Bank issued numerous inspection reports and directions, all of which were placed on the record and made available to the petitioner, Palai Bank. Moreover, the application before the Court demonstrated that the Bank had ample opportunity to present its case and to articulate its perspective before any decisive action was taken. The Court emphasized that, given the severe run on the Bank—withdrawals amounting to seven lakh rupees per day—it would have been impossible for the Reserve Bank to pause and conduct a full hearing before deciding on remedial measures. The emergency nature of the situation, the Court held, justified the swift procedural steps authorized by the Act and employed in this instance. In light of these considerations, the Court found that the objections concerning lack of hearing and reasoned decisions could not be sustained.

The principal ground of attack raised by the petitioner's counsel was the manner in which sections 38(1) and 38(3)(b)(iii) of the relevant statute obligate the High Court to issue a winding‑up order for a banking company whenever the Reserve Bank, exercising its statutory authority or acting on an order of the Central Government, makes an application for such winding up. The petitioner's counsel argued that this power vested in the Reserve Bank was unchecked and despotic, because it effectively barred the courts from making an independent assessment of whether the affairs of the bank were being conducted to the detriment of depositors, a factual determination that could be proved like any other. It was submitted, as a matter of principle, that any law which precludes the court from deciding a case is unreasonable unless justified by additional factors. Counsel for the petitioner, while supporting the earlier arguments, further contended that the legislation in question transformed a judicial process into an executive action, allowing a subjective determination by the Reserve Bank to replace a judicial one. He also asserted that the Reserve Bank, after accusing a banking company, proceeds to try the issue to the complete exclusion of the courts. It was emphasized that although the winding up of a banking company occurs before the High Court and follows the procedural law, the critical judicial step—deciding whether a winding‑up order should be made—is excluded, being left solely to the Reserve Bank. The court then merely implements the Reserve Bank’s opinion by issuing the order and carrying out the winding up in accordance with the law. The narrow question before the court therefore was whether delegating this decision to the Reserve Bank violated the principles of natural justice and, in light of Article 19 of the Constitution, became so unreasonable as to be void. Both parties framed their arguments around this pivotal issue, which constituted the core of the dispute. In support of the petitioner's position, reliance was placed on several precedents of this Court. The first authority cited was A. K. Gopalan v. The State (1), wherein the validity of sections 3, 7, and 10‑14 of the Preventive Detention Act, 1950, was challenged through a petition under Article 32 for a writ of habeas corpus. Observations of Chief Justice Kania and Justice Fazl Ali were quoted, the latter emphasizing that the right to be heard and tried forms the very foundation of the rule of law, and that a fundamental principle requires a person whose rights are affected to be given a hearing. The discussion proceeded to examine further case law illustrating the application of the audi alteram partem principle.

The Court referred to a number of decisions in which the principle of hearing the other side – the maxim audi alteram partem – was invoked and applied. In particular, it quoted the observations of Lord Macnaghten in Lapointe v. L’Association, etc., de Montreal (1), where the Lord condemned any procedure that required no hearing as being “contrary to rules of society and above all contrary to the elementary principles of justice.” The Court stated that it could not be reasonably said that there would be no hearing in cases of the type before it. While it agreed that it is repugnant to the rule of law in civilized nations for a person to be condemned without being heard, the Court could not conclude that in the present matter the Palai Bank had not been heard. The case was described as typical of those in which such a power might be exercised. The Court noted that the Attorney General had shown that there was ample opportunity for the bank to be heard before the application was filed. Consequently, the essential objection was framed as the claim that the Palai Bank had not been heard in the High Court before the impugned order was made. The Court explained that if a valid law could be enacted that left to the Reserve Bank the determination of whether a banking company should be wound up, with the Court merely implementing that decision, then the present petition would fail; if, however, such a delegation of authority were impermissible, the petition would succeed. Accordingly, the Court held that it must examine whether any inviolable rule exists that every determination must always be made by a court and by no other authority. In reviewing the authorities previously cited, the Court said it would consider whether a sweeping proposition of that kind had been established (1) [1906] A.C.535. Turning to A. K. Gopalan’s case (1), the Court recalled that section 14 of the Preventive Detention Act was held void for contravening Article 22(5) of the Constitution because it prevented a detained person from disclosing to the Court the grounds of his detention and from making a representation. The Court affirmed that the right to approach an appropriate court for a writ of habeas corpus and to show that the detention was improper was undeniable, and therefore section 14 was declared void. No general rule was laid down in that case that the Court must decide whether a person should be detained; the law permitting a subjective executive determination was, in fact, upheld, and the majority judgments contained passages indicating that a judicial trial was not considered necessary in preventive detention cases. The Court then discussed State of Madras v. V. G. Row (2), where sections 15(2)(b) and 16 of the Indian Criminal Law Amendment Act, 1908, as amended by the Indian Criminal Law Amendment (Madras) Act, 1950, were challenged on the ground that they allowed the State to declare associations illegal by a notification without providing for a judicial enquiry.

In its judgment the Court observed that granting the executive Government power to restrict the right of association without permitting the factual and legal bases of such restriction to be examined in a judicial enquiry constitutes a significant factor when assessing the reasonableness of the restriction. The Court added that a system in which the Government or its officers are satisfied subjectively, and an Advisory Board merely reviews the material on which the Government seeks to curtail a basic freedom guaranteed to a citizen, may be regarded as reasonable only in extremely exceptional circumstances. The Court further explained that the test of reasonableness must be applied to each individual statute that is challenged, and that no abstract standard or universal pattern of reasonableness can be prescribed for all cases. The decision in V. G. Row’s case (1) demonstrated that statutes allowing a subjective determination by the executive are not to be invalidated automatically; rather, their reasonableness must be evaluated according to standards appropriate to the particular circumstances. It was noted that V. G. Row’s case (1) distinguished between a law that authorises anticipatory action on the basis of suspicion and a law that authorises action founded on the factual existence of certain grounds. Accordingly, the Court distinguished A. K. Gopalan’s case (2) and Dr N. B. Khare v. State of Delhi (3) on this narrow ground, a distinction that the learned Attorney‑General appeared to accept. The Court held that the factual existence of grounds that can be objectively determined by the Court in the present matter – specifically, prejudice to the interests of depositors – brings the case within the principle articulated in V. G. Row’s case (1). However, the Court emphasized that cases involving detention or the declaration of unlawful associations are not comparable to a banking company faced with a run by depositors, whose affairs, upon inspection, are found to be mismanaged and unable to meet lawful demands. In the present situation, the factual background does not consist of mere suspicion; instead, the action is based on concrete facts that are ordinarily examined repeatedly before a final decision is reached, and the Court considered it impossible to equate such a scenario with either A. K. Gopalan’s case (2) or V. G. Row’s case (1). (1) [1952] S.C.R. 597. (2) [1950] S.C.R. 88. (3) [1950] S.C.R. 519.

The judgment then referred to the case of Thakur Raghubir Singh v. Court of Wards, Ajmer (1). In that case the Court declared Section 112 of the Agra Tenancy and Land Records Act (42 of 1950) to be void. That provision authorised the Court of Wards to assume control of a landlord’s property under the Ajmer Government Wards Regulation (1 of 1888) where the landlord habitually infringed the rights of tenants. The Court’s reasoning focused on the fact that the provision effectively eliminated the fundamental right guaranteed under Article 19(1)(f) by making the enjoyment of that right dependent solely on the discretionary discretion of the executive, without providing any mechanism for the landlord to challenge the determination before a civil Court. The lack of such a procedural safeguard was held to render the statutory provision invalid. The learned Attorney‑General conceded this point, and the Court observed that the underlying principle was that a person should not be subjected to punishment or penalty without an opportunity to be heard and to show cause. The Court therefore considered whether the reasoning in that case could be applied to the present matter, concluding that no universal rule could be derived beyond the specific principle already discussed.

The Court explained that under section 112 a landlord who habitually infringed the rights of his tenants was declared “disqualified to manage his property.” The provision was struck down because it completely negated the fundamental right guaranteed under Article 19(1)(f) by making the enjoyment of that right depend solely on the discretion of the executive. The Court further observed that the statute lacked any provision that would allow a landlord found to be a habitual violator to approach a civil court and test the correctness of the determination made against him. This omission, the Court held, rendered the section invalid. The learned Attorney‑General, appearing for the government, conceded this point. However, the Court noted that the underlying reason for the rule was that the law prescribed a punishment or penalty for the landlord’s misconduct, and that no person should be punished without first being given an opportunity to show cause.

The Court then turned to the question of whether the reasoning in that case could be applied to the present circumstances. It observed that the earlier decision did not lay down any general principle that would extend to all cases beyond the specific facts that had been considered. Accordingly, the Court held that the action of winding up a banking company could not be characterised as a punishment for mismanagement. Rather, such an action was intended to protect the rights of depositors, and the two situations were therefore hardly comparable.

The Court subsequently referred to two further decisions. The first was Commissioner, Hindu Religious Endowments, Madras v Sri Lakshmindra Tirtha Swamiar of Sri Shirur Mutt, reported in (2) [1954] S.C.R. 1005. The second was Mahant Sri Jagannath Ramanuj Das v The State of Orissa, reported in (1) [1953] S.C.R. 1049 and also in (3) [1954] S.C.R. 1046. Counsel for the State conceded that certain sections of the Madras Religious and Charitable Endowments Act (XIX of 1951) and of the Orissa Hindu Religious Endowments Act, 1939 (as amended in 1952), were ultra vires Articles 19(1)(f), 25 and 26 of the Constitution. The Court found that the provisions in the Madras case were extremely drastic in character, the worst feature being the complete denial of access to the courts.

The Court explained that the Act was considered drastic because it authorised the notification and takeover of a religious institution, vesting it in an executive officer, merely on the basis that the Board “was satisfied that in the interests of proper administration of the Math and its endowments, the settlement of a scheme was necessary.” In the Orissa case, the Court observed that Sections 38 and 39 dealt with the framing of such a scheme. While a scheme could legitimately be created to ensure proper administration of endowed property, the objection lay in the fact that the Act allowed the scheme to be framed not by a civil court or under its supervision but by a Commissioner who was merely an administrative or executive officer. Moreover, the Act provided no provision for an appeal against the Commissioner’s order to any court.

Finally, the Court commented on the amendment of sub‑section (4) of Section 39, which removed the right of suit and made the Commissioner’s order final and conclusive, thereby further limiting judicial review of the scheme‑framing process.

The Court held that when a scheme concerning a religious institution is settled by an executive officer without any judicial tribunal, it creates an unreasonable restriction on the property right of the institution’s superior, a right that is attached to his office; consequently, Sections 38 and 39 of the Act were declared invalid. These passages suggest that the involvement of a judicial tribunal is indispensable for a reasonable determination of any issue. The Court, however, said that these holdings must be read together with the decision in Sri Sadasib Prakash Brahmachari v. State of Orissa. Following that judgment, the Orissa Legislature enacted Orissa Act XVII of 1954, which was intended not to amend the 1939 Act but to amend Orissa Act II of 1952—a statute that had been passed but not yet brought into force. Subsequently, Orissa Act XVIII of 1954 received the President’s assent and came into force immediately, thereby amending and modifying the 1952 Act. The 1952 Act was finally brought into force on 1 January 1955 by a notification. The new legislation dealt with the same subject‑matter as the 1939 Act; it continued to remove the right of suit but introduced a direct right of appeal to the High Court. Counsel again argued that the Act remained unconstitutional for the reasons articulated in the earlier 1951 case. The Court observed that the initial decision in a scheme proceeding still rests on an executive inquiry conducted by an executive officer, and that a direct appeal to the High Court against the Commissioner’s order does not provide as adequate a safeguard for Mahants’ rights as the combination of an independent suit and a subsequent appeal in the ordinary court hierarchy. The Court acknowledged that, from a litigant’s perspective, an appeal to the High Court differs from an independent right of suit and an appeal from the judgment of that suit. Nevertheless, to determine whether the provisions constitute an unreasonable constitutional restriction, the Court explained that one must examine whether the affected person obtains a reasonable opportunity to present the entire case before the original tribunal, which must judicially determine the questions raised, and whether there exists a regular appeal to an ordinarily constituted court to correct any errors of that first tribunal. For this purpose, the Court noted that under the present Act, the Commissioner of Endowments, by virtue of Section 4, must be a member of the State Judicial Service not below the rank of a Subordinate Judge.

The Court observed that under section 7 of Act IV of 1939 the Commissioner of Endowments could be drawn from either the judicial service or the executive service, and that even when a member of the judicial service was appointed, the Commissioner might hold a position below the rank of a Subordinate Judge. The Court then highlighted an important distinction: under section 38 of the earlier Act the enquiry was required to be conducted “in such manner as may be prescribed,” meaning it was to be prescribed by the Provincial Government through rules made under the Act and therefore subject to change by the Government. In contrast, the present Act, by virtue of section 42(1)(b), specifically directed that the “Commissioner shall bold an enquiry in the manner prescribed and so far as may be in accordance with the provisions of the Code of Civil Procedure relating to the trial of suits.” On the basis of this comparison, the Court held that the scheme created by the present Act was not unreasonable. At page 59 of the Report a summary of the four steps that rendered the scheme reasonable was set out as follows: (1) the scheme is to be framed by a Commissioner who, by appointment, is a judicial officer; (2) the procedure is, as far as possible, the same as that used in the trial of suits; (3) there is a preliminary enquiry by the Assistant Commissioner; and (4) there is an appeal to the High Court. This formulation marked a departure from the earlier insistence on the intervention of a judicial tribunal; it was deemed sufficient that the person conducting the enquiry was a judicial officer and that the procedure followed the trial‑of‑suits method prescribed in the Civil Procedure Code. The Court further examined earlier schemes that might have been framed by (a) an executive officer and (b) a procedure prescribed by the Executive Government, describing such possibilities as “merely a theoretical possibility.” The absence of a preliminary enquiry, referred to as No. (3), was not regarded as a serious defect. The order of an executive officer, noted as No. (1), was held to be of no consequence because the Commissioner was a Subordinate Judge of the Orissa Judicial Service. Likewise, the question of procedure, identified as No. (2), was not considered important, since the rules prescribed closely resembled the procedure of a suit trial. Regarding the right of appeal, section 79A provided a right of appeal in all decided cases, and the Court considered this provision adequate, although it was not established whether the appeal was actually exercised in every case. From the three decisions examined, the Court concluded that the essence of reasonableness lay less in the title of the officer and more in a judicial approach to the matter, employing a procedure that ensured an adequate hearing. The fact that the Commissioner was a judicial officer of the rank of Subordinate Judge was deemed sufficient to uphold his actions as reasonable. Consequently, the Court rejected the proposition that every decision must be made by a court; the case demonstrated that such a requirement was not essential.

The Court observed that the involvement of a judicial officer was not an indispensable condition as long as an individual trained to resolve disputes conducted the proceeding in a manner that allowed the parties to be fully heard. The Court then referred, without a detailed analysis, to the decision in Ebrahim Vazir Mavat v. State of Bombay (1). In that case, section 7 of the Influx from Pakistan (Control) Act, 1949, was declared void. Section 7 empowered the Central Government to remove from India any person “who has committed or against whom a reasonable suspicion exists that he has committed an offence under this Act.” While examining that provision, the Court remarked that the section imposed the penalty of removal not only after a conviction under section 5 but also where the Government entertained a reasonable suspicion of an offence, leaving the determination of guilt entirely to the Government’s subjective opinion. The Court highlighted that the offender was given no opportunity to clear his conduct and described the situation as “nothing short of a travesty of the right of citizenship.” The reasoning was based on the principle that an Indian citizen possessed a fundamental right to remain in India, and that removal—being a penalty—could not be imposed without affording the individual a chance to rebut the allegation. The Court then noted, as previously mentioned in Thakur Raghubir Singh’s Case (2), that no punishment was involved and that a hearing indeed took place, although it was not before a Court. Moreover, the Influx from Pakistan (Control) Act contained no requirement that the opportunity to refute the alleged offence be exercised through judicial proceedings. The appellant also cited K. T. Moopil Nair v. State of Kerala (1), Abdul Hakim v. State of Bihar (2) and State of Madhya Pradesh v. Baldeo Prasad (3), but the Court found that those authorities did not address the present issue and were decided on entirely different facts. Consequently, the Court concluded that the broad proposition that every determination affecting liberty, rights or property must be made exclusively by a judicial tribunal was not supported by the cited cases. Finally, the Court stated that the Reserve Bank, in its interactions with banking companies, acted on established facts rather than on mere suspicion. Those facts were required by statute to be submitted to the Reserve Bank, which then inspected the banks, granting licences only when the banks conducted their affairs in the interests of depositors.

In this case, the Reserve Bank may withdraw the licence if the banking company does not comply. With the statutory power to access the affairs of a banking company, the Reserve Bank is guided by the phrase “detrimental to the interests of the depositors” to determine when and how to exercise its power. The Reserve Bank has, in the present proceedings, presented a clear assessment of the financial condition of Palai Bank. By juxtaposing the bank’s total demand and time liabilities with its liquid assets, borrowing capacity and realizable advances, the Reserve Bank demonstrated that Palai Bank lacks the ability to meet its lawful claims, and a state of affairs is disclosed which is certainly not beneficial to the depositors whose money remains at risk. The judgment cites: (1) [1961] 3 S.C.R. 77, (2) [1961] 2 S.C.R. 610, (3) [1961] 1 S.C.R. 1970. The Reserve Bank has not yet disclosed all its findings; those matters are expected to emerge during the winding‑up proceedings. Nevertheless, it appears certain that any action will be taken only after a thorough examination of all evidence and a careful re‑verification of the findings. It is therefore not appropriate to apply the observations made in the earlier cases to the present facts. The Attorney‑General, for the respondent, referred the Court to Virendra v. State of Punjab, wherein it was observed that, in assessing the reasonableness of a statute, one must consider the surrounding circumstances of its enactment, the purpose behind it, and the urgency of the evil it seeks to remediate. That case dealt with the restriction of freedom of speech under the Punjab Special Powers (Press) Act, 1956. While analysing the reasonableness of excluding courts from such determinations, the Court noted that the legislature must ask which authority is best placed to decide, at any given time, whether prevailing conditions justify imposing restrictions on freedom of speech, expression, or on the conduct of any trade or business, and to what extent. The Court held that the answer is the State Government, because it alone possesses all material facts and therefore is best equipped to investigate circumstances, assess urgency, and decide what anticipatory measures, if any, are necessary to prevent a threatened breach of peace. The Court further observed that the judiciary is unsuitable to gauge the seriousness of a situation, as it does not have access to the material facts available only to the executive. (1) [1958] S.C.R. 308.

In this case, the Court observed that decisions about whether to restrict the press must necessarily be left to the judgment and discretion of the State Government, a responsibility that the legislature expressly conferred by enacting the relevant statute. The Court emphasized that the effectiveness of such powers depends on quick decision‑making and swift, decisive action, and therefore the exercise of those powers must rest on the subjective satisfaction of the Government. It was further noted that subjecting the exercise of these powers to judicial review would defeat the purpose of the legislation. The Court explained that there are circumstances in which the legislature may, for reasonable reasons, decide that an expert executive body such as the Reserve Bank of India should determine an issue rather than the Courts, without rendering the law unconstitutional. Such legislation is justified on grounds of expediency arising from the specific opportunities for action presented by the situation. However, the exclusion of Courts from review is not to be presumed lightly; the reasonableness of the law in the overall circumstances must be demonstrated to the Court’s satisfaction, and the Court will uphold the law only when it finds it reasonable in the particular context. Turning to the facts of the present matter, the Court considered the history of the Reserve Bank as India’s central bank, its role as a “banker’s bank,” its control over banking companies, its authority as the issuing bank, its power to grant and revoke banking licences, and its numerous other functions. Given this extensive authority, the Court held that the decision to wind up a weak or unsafe banking company in the interest of depositors may reasonably be left to the Reserve Bank rather than to the Courts. While the Court recognised that it could also perform this function if time permitted, the urgency of the decision requires immediate action, and the Reserve Bank already possesses intimate knowledge of the affairs of banking companies, including access to their books and accounts. If the Court were required to act promptly, it would inevitably rely on the Reserve Bank’s opinion; it would be impossible for the Court to reach a conclusion without the Reserve Bank’s guidance in such urgent situations. Consequently, a challenge to the law that accords the same weight to the Reserve Bank’s opinion was deemed to have no merit. The Court observed that the situation in the present case is typical of those in which such extraordinary power would normally be exercised, and reiterated that if the Reserve Bank were to abuse its power, the remedy would be to strike down the Reserve Bank’s action, not the statute itself. An appeal against the Reserve Bank’s action or a provision for an ex post facto finding would thus be unnecessary.

In this case, the Court noted that an appeal to the Central Government would be comparable to a “Caesar to Caesar” situation because the Reserve Bank would scarcely act without the concurrence of the Central Government, and a finding by the Court would amount to a post‑mortem examination of the bankrupt banking company. The Court observed that a procedure for winding up other banks and financial institutions existed in statutes that excluded the Companies Act. It listed co‑operative societies, State Financial Corporations, the State Bank of India, the Industrial Finance Corporation, the Life Insurance Corporation and the Reserve Bank itself, all of which were to be liquidated under special laws created for them rather than under the Companies Act. In view of this, the Court said that reference to American and Japanese precedents was not necessary, although it examined those laws to show that even in the United States and Japan the closure and liquidation of banks normally arise from executive action. The Court described the Japanese Banking Law of 1929, noting that Articles 22, 23, 24 and 27 empowered the competent Minister to order a bank to suspend business, to deposit its property with an official depository, or to issue any other order deemed necessary. Article 22, the Court quoted, provided that if the Minister found it necessary in view of a bank’s affairs or the condition of its property, he could take such actions. The Court also observed that Articles 22 and 29 of the Japanese Constitution guarantee the people’s freedom to own property and to choose occupations, similar to the guarantees in the Indian Constitution. Turning to the United States, the Court explained that banks are regarded as proper subjects of legislative regulation under the police power, a power that is not subject to the limitations of the Fourteenth Amendment except that it must be exercised reasonably. It noted that both national and state banks are governed by distinct statutes for winding up insolvent banks, and that many states provide special proceedings for insolvent state banks while the National Bank Act contains specific provisions for national banks. The Court stated that the closing of a national bank by the Comptroller of the Currency on the ground of insolvency and the appointment of a receiver do not constitute a breach of the due‑process clause, citing Corpus Juris Secundum which affirmed that courts have generally upheld the validity of statutes authorising liquidation of state banks and the control and administration of assets by state officials or receivers.

The Court observed that, under American law, receivers or liquidators appointed by the relevant authorities determine a bank’s solvency and adjudicate claims against the bank. It noted that the National Bank Act confers such power on the Comptroller of the Currency, while state statutes confer comparable authority on state superintendents of banks. The Court explained that in certain states the banking officials lack any power to liquidate insolvent banks without judicial involvement, whereas in other states the statutes expressly provide that power to the officials. In arriving at this observation, the Court referred to American Jurisprudence, volumes seven, nine, thirteen and fifteen, as well as to the Corpus Juris Secundum, and cited several United States law reports, namely Title Guaranty and Surety Co. v. Idaho, Ex Rd. Allen, Bushnell v. Leland, and Ex parte Chetwood, among others. Counsel for the petitioner contested the reliance on these American authorities, arguing that banking in the United States operates by legislative grace as a franchise or privilege and thus has no analogue in the Indian Constitution. He emphasized that the cited cases, such as (1) (1916) 240 U.S. 130 : 60 L. Ad. 566; (2) (1897) 164 U.S. 684, 41 L. Ad. 598; and (3) (1897) 165 U.S. 443, 41 L. Ad. 782, concern the absence of a fundamental right to carry on business under the American Bill of Rights, a right that has only been incorporated into the Fourteenth Amendment by judicial construction. Consequently, the petitioner maintained that American decisions and statutes should not be invoked in this case. The Court, however, found no merit in attempting to compare the American constitutional framework and banking legislation with the Indian system, stating that such a comparison would not serve any useful purpose and that it would not base its decision on American or Japanese analogies.

The Court further rejected the contention that the impugned provision of the Banking Companies Act encroached upon judicial power. It pointed out that the statutory landscape contains numerous instances where courts of civil judicature rely on the determinations of external agencies; the Arbitration Act was cited as a readily observable example, wherein a court may render a decree based on an award chosen by the parties. The Court noted that the possibility of an error by the Reserve Bank of India does not carry heightened significance, for when the Reserve Bank acts in good faith and with due caution, the risk of mistake is comparable to that which exists before a court of law. Moreover, the Court held that alternative, less drastic remedies such as a moratorium, amalgamation, or reconstruction were not practicable in the present circumstances. The specific difficulty with Palai Bank lay in the nature of its advances, which were either unrecoverable or not readily recoverable, rendering a time‑limited moratorium ineffective, while amalgamation and reconstruction were deemed impossible at the advanced stage of the crisis. Consequently, the Court concluded that sections 38(1) and 38(3)(b)(iii) of the Banking Companies Act are neither discriminatory nor unreasonable, and therefore do not offend the constitutional guarantees of equality or liberty of trade.

In the present case the Court concluded that the provisions of section 38(1) and section 38(3)(b)(iii) of the Banking Companies Act are not unreasonable and therefore cannot be declared void on the basis of Articles 14 and 19 of the Constitution. Since the provisions plainly serve the public interest, the Court held that they are also not ultra vires under Article 301, because the protection granted by Article 302 shields them from challenge on that ground. Accordingly, the appeal and the petition were dismissed, and the parties were ordered to bear a single set of costs.

The Court observed that the substantive facts had already been fully set out in the earlier judgment of Justice Hidayatullah, and therefore did not repeat them. The essential issue for determination was whether the power conferred by section 38(3)(b)(iii) of the Banking Companies Act (Act X of 1948) exceeded the limits of the Constitution by imposing an unreasonable restriction that infringed the petitioners’ rights under Article 14 and Article 19(1)(f) and (g). Under the said provision, the Reserve Bank of India filed a winding‑up petition against Palai Bank Ltd. in the Kerala High Court on 8 August 1960, and on the same day an application for the appointment of a provisional liquidator was made, resulting in the appointment of such liquidator. The directors of the bank objected in the High Court, contending that section 38(3)(b)(iii) was invalid and unconstitutional because it violated Articles 14 and 19 and that the petition was filed mala‑fide. After the liquidator’s appointment, four schemes of arrangement were presented to the Court pursuant to section 44B of the Act. On 6 October 1960 the Court directed the Reserve Bank to examine the feasibility and effectiveness of those schemes. The Reserve Bank submitted its report on 22 October 1960, concluding that, on a preliminary basis, the schemes were not workable. Consequently, the Court issued an order of winding up on 5 December 1960. The allegation of mala‑fide was not pursued further, and the High Court found no violation of the petitioners’ constitutional rights. The Court further observed that, although the wording of the impugned provision does not obligate the Reserve Bank to disclose the material on which it based its conclusion that the continued existence of Palai Bank would prejudice depositors’ interests, the Bank chose to place all relevant material before the Court. Those materials showed that, since 1952, the Reserve Bank had repeatedly drawn the bank’s attention to serious deficiencies in its operations and had given it multiple opportunities to explain or remedy those defects. Palai Bank took no corrective action. The Court therefore held that the Reserve Bank, far from acting without material or in a hasty and ill‑considered manner, had, mindful of its grave responsibility to preserve the country’s banking structure, acted with the requisite care and circumspection, even though that approach attracted criticism from those who did not share its responsibilities.

In order to understand the constitutional issues raised by the provision that was challenged, the Court reviewed the historical development of banking legislation in India. The Government of India had appointed an Indian Central Banking Enquiry Committee, which issued its report on 2 June 1931. Paragraph 674 of that report identified the principal causes of bank failures. Subsequently, Part XA was introduced into the Indian Companies Act 1913 by Act 2 of 1936; this part dealt with banking companies but did not contain a distinct provision for their winding‑up. The Reserve Bank of India Act, known as Act II of 1934, was enacted in 1934, and minor amendments affecting banking companies were later made to the Companies Act by the Acts of 1942 and Act 4 of 1944. On 15 January 1946 the Banking Companies Ordinance (Ordinance 4 of 1946) was promulgated. That ordinance authorized the Central Government to direct the Reserve Bank of India to inspect any banking company and its books and accounts. It also empowered the Central Government, upon receipt of a report that a banking company’s affairs were being conducted to the detriment of depositors, to prohibit the company from receiving fresh deposits, to refuse its inclusion in the schedule of the Reserve Bank of India Act, or to remove it from that schedule. The Banking Companies Act (Act X of 1949) was passed on 10 March 1949, providing a more comprehensive statutory framework. The Banks’ Liquidation Proceedings Committee of 1952 submitted its report on 31 December 1952. According to that report, between 1926 and 1952 a total of 851 banks had suspended payments, with aggregate liabilities amounting to Rs 96.86 lakhs. Of those banks, 123 were located in Travancore‑Cochin, making that region the most heavily represented. The report explained that the sluggish progress of liquidation proceedings stemmed from several factors: advances were largely unsecured, recovery required lengthy litigation, there were insufficient funds to prosecute legal actions, many claims were barred by limitation periods, contributories could not be located, and unpaid capital could not be recovered. In the case of small banks, the advances were modest while legal costs for realization were disproportionate to the amounts involved, leading claimants to abandon their claims. Moreover, directors often delayed filing the statements required under section 177A of the Companies Act, a delay that further impeded the liquidation process. Over time, the Banking Companies Act was amended repeatedly, and by section 26 of Act 33 of 1959 the present section 38, which governs winding‑up, replaced the earlier provision. The Court therefore found it useful to examine both the scheme of the Reserve Bank of India Act and the scheme of the Banking Companies Act to assess the validity of the provision under challenge.

The Court observed that the preamble of the Reserve Bank of India Act declared that the Act had been enacted to secure monetary stability in India and to manage the country’s currency and credit system. By virtue of section 3, the Reserve Bank was established with the purpose of assuming the management of the currency from the Central Government and of conducting banking business in accordance with the provisions of the Act. Section 7 dealt with the management of the Bank and authorized the Central Government to issue directions to the Bank after consulting the Governor, whenever such directions were deemed necessary in the public interest. Under section 8, the Central Board of the Bank was constituted; it comprised the Governor, four Directors nominated by the Central Government from among the local Boards, six Directors nominated by the Central Government, and one Government official also nominated by the Central Government. In effect, every Director on the Board was a nominee of the Central Government. Section 11 gave the Central Government the power to remove the Governor or any Director, while section 12 required that casual vacancies on the Board be filled by the Central Government. Section 17 defined the scope of business that the Bank could transact, and Chapter III related to the Central banking functions of the institution. Furthermore, section 30 empowered the Central Government to supersede the Central Board and to entrust its functions to such agency as it might determine. From these provisions, the Court concluded that the Reserve Bank was an institution created to perform central banking functions and that its management was wholly in the hands of the Central Government or its nominees. Turning to the Banking Companies Act, the Court noted that section 2 stated that the provisions of that Act were supplemental to, and not, unless expressly provided, in derogation of the Companies Act, 1956, or any other law in force. Section 4 conferred on the Central Government the authority to suspend the operation of the Act upon the representation of the Reserve Bank. Section 5 served as the interpretation clause. Part II of the Act addressed the “Business of the Banking Companies,” and Section II within that Part prescribed the requirements concerning minimum paid‑up capital and reserves of banking companies. Section 22 vested the Reserve Bank with the power to grant licences to banking companies and prohibited any entity from carrying on banking business without a licence issued by the Reserve Bank, which could be issued subject to such conditions as the Reserve Bank deemed appropriate. The Court further explained that every banking company existing at the commencement of the Act was required to apply for a licence within six months of that commencement, while any other company had to obtain a licence before commencing banking business. Existing companies were permitted to continue their banking operations until a licence was either granted or refused, but the Act stipulated that a licence could not be refused before the expiry of three years from the date of application.

The Court observed that section eleven, sub‑section three, authorises the Reserve Bank to inspect the books of a banking company in order to satisfy itself on the matters mentioned in that sub‑section. Section eleven, sub‑section four, provides that the Reserve Bank may cancel a licence granted to a banking company, but only after giving the company an opportunity to show cause why the licence should not be cancelled. Section eleven, sub‑section five, further provides that any banking company aggrieved by an order of the Reserve Bank cancelling its licence may appeal to the Central Government, and the decision of the Central Government is final.

Section twenty‑four requires every banking company to maintain a specified percentage of its assets in cash, gold or unencumbered approved securities, and to keep an amount that is not less than twenty percent of the total of its time and demand liabilities. The banking company must furnish a return of this holding periodically to the Reserve Bank. Section twenty‑five deals with the assets of every banking company in India, section twenty‑seven governs the making of monthly returns by banking companies to the Reserve Bank, and section thirty prescribes the audit requirements applicable to banking companies.

Section thirty‑five empowers the Reserve Bank, at any time and upon direction by the Central Government, to cause an inspection of any banking company. Sub‑section four of that section states that, if directed by the Central Government, the Reserve Bank shall cause an inspection to be made and may, in any other case, report to the Central Government on an inspection carried out under this provision. The Central Government, after considering such a report, may, if it is of the opinion that the affairs of the banking company are being conducted to the detriment of the interests of its depositors, give the banking company a reasonable opportunity to make a representation in connection with the report. Upon satisfaction of the Central Government, it may by written order prohibit the banking company from receiving fresh deposits and may direct the Reserve Bank to invoke section thirty‑eight for the winding‑up of the banking company. The provision further allows the Central Government to defer, for a period it deems fit, the passing of such an order, or to cancel or modify any such order, imposing any terms and conditions it considers appropriate.

Section thirty‑five‑A confers upon the Reserve Bank the power to issue directions when the Reserve Bank is satisfied that it is necessary in the public interest, or to prevent the affairs of any banking company from being conducted in a manner detrimental to depositors, or prejudicial to the banking company, or to secure proper management of any banking company. Under sub‑section one, the Reserve Bank may, from time to time, issue any directions it deems fit, either generally to all banking companies or specifically to a particular banking company, and the banking companies are bound to comply with such directions. Sub‑section two provides that the Reserve Bank may, on a representation made to it or on its own motion, modify or cancel any direction issued under sub‑section one, and in so doing may impose such conditions as it thinks fit, which shall have effect as stipulated.

The Court explained that a banking company, depending on the circumstances, must obey any direction that is issued under subsection (1). It further noted that the Reserve Bank, either on receiving a representation or on its own initiative, may modify or cancel any such direction, and that in exercising that power the Reserve Bank may attach conditions it deems appropriate, with the modification or cancellation taking effect subject to those conditions. The Court then turned to Section 36, which outlines additional powers and functions of the Reserve Bank. Under this provision the Reserve Bank may caution or prohibit a banking company from entering into any specific transaction or class of transactions. It may also assist any proposal for the amalgamation of companies and may extend loans to banking companies. Moreover, the Reserve Bank may require a banking company to convene a meeting of its directors for the purpose of considering any matter that relates to or arises out of the affairs of the banking company; it may require the company to deputise one or more of its officers; it may monitor proceedings at any meeting of the board of directors; and it may appoint one or more of its own officers to observe how the affairs of the banking company are being conducted. In addition, the Reserve Bank may compel the banking company to make changes in its management that the Reserve Bank considers necessary. The Court pointed out that Part III of the Act deals with the suspension of business and the winding up of banking companies. Section 37 provides that, upon an application by a banking company, the High Court may stay the commencement or continuance of all actions against that company and may impose a moratorium. However, such an application is not maintainable unless it is accompanied by a report from the Reserve Bank stating that, in the Reserve Bank’s opinion, the banking company will be able to pay its debts if the application is granted. The Court clarified that the High Court may, for sufficient reason, grant relief under this section even when the application is not accompanied by the Reserve Bank’s report; in such an event the High Court must call for a report from the Reserve Bank on the affairs of the banking company and pass any order it deems appropriate in the circumstances. Under subsection 3 of Section 37 the High Court may appoint a special officer to take into custody or control all assets, books and documents of the banking company and may exercise any other powers it thinks fit, having regard to the interests of the depositors. Subsection 4 provides that if the Reserve Bank is satisfied that a banking company, against which an order has been made, is conducting its affairs in a manner detrimental to the interests of its depositors, the Reserve Bank may make an application to the High Court for winding up of that company, and once such an application is made the High Court shall not make any order extending the period. Finally, the Court reproduced the impugned provision of Section 38, which deals with winding up, stating: “S.38 (1) ‘Notwithstanding anything contained in section 391, section 392, section 433 and section 583 of the Companies Act, 1956 but without prejudice to its powers under…’”.

According to sub‑section (1) of section 37 of the Act, the High Court is required to order the winding up of a banking company when either the company is unable to pay its debts or when the Reserve Bank has made an application for winding up under section 37 or the present section. Sub‑section (2) provides that the Reserve Bank must file an application for winding up a banking company under this section if the Reserve Bank is directed to do so by an order made under clause (b) of sub‑section (4) of section 35. Under sub‑section (3) the Reserve Bank is empowered to make an application for winding up a banking company in several circumstances. First, under clause (a) the Reserve Bank may apply if the banking company has failed to comply with the requirements specified in section 11, or if, by reason of the provisions of section 22, the company has become dis‑entitled to carry on banking business in India, or if the company has been prohibited from receiving fresh deposits by an order made under clause (1) of sub‑section (4) of section 35, or by an order made under clause (b) of sub‑section 3(A) of section 42 of the Reserve Bank of India Act, 1934. Second, the Reserve Bank may also apply if the company, having failed to comply with any requirement of this Act other than those laid down in section 11, continues such failure, or if the company has contravened any provision of the Act and continues such contravention beyond any period that the Reserve Bank may specify after giving written notice of the failure or contravention to the company. In addition, under clause (b) the Reserve Bank may apply if, in its opinion, a compromise or arrangement sanctioned by a court cannot be worked satisfactorily, whether or not it is modified; or if the returns, statements or other information furnished to the Reserve Bank disclose that the banking company is unable to pay its debts; or if the continued existence of the banking company is prejudicial to the interests of its depositors. Sub‑section (4) states that, without prejudice to the provisions of section 434 of the Companies Act, 1956, a banking company shall be deemed unable to pay its debts if it refuses to meet any lawful demand made at any of its offices or branches within two working days when the demand is made at a place where there is an office, branch or agency of the Reserve Bank, or within five working days when the demand is made elsewhere, and if the Reserve Bank subsequently certifies in writing that the company is unable to pay its debts. Sub‑section (5) requires that a copy of every application made by the Reserve Bank under sub‑section (1) be sent by the Reserve Bank to the registrar. Section 44A of the Act sets out the procedure for the amalgamation of banking companies, and section 44B limits the powers of the High Court to sanction a compromise or arrangement between a banking company and its creditors unless such compromise or arrangement is certified by

In this case the Court explained that Section 45 of the Banking Companies Act furnishes the Reserve Bank with broad authority to intervene in the affairs of a banking company. Under this provision the Reserve Bank may apply to the Central Government for an order of moratorium concerning a banking company, and the Central Government may, after considering such an application, issue an order staying the initiation or continuation of any legal action or proceeding against the company. The statute also empowers the Reserve Bank to prepare a scheme for the reconstitution or amalgamation of a banking company. The two relevant subsections of Section 45 are set out as follows: subsection (1) states that, notwithstanding any other law, agreement or instrument, if the Reserve Bank is satisfied that there is good reason, it may apply to the Central Government for a moratorium in respect of a banking company; subsection (2) provides that the Central Government, after hearing the Reserve Bank’s application, may order a moratorium that stays all actions against the company for a fixed period, on such terms and conditions as it deems fit, and may extend that period, provided that the total duration does not exceed six months. The Court observed that these provisions demonstrate the extensive powers conferred on the Reserve Bank in relation to banking companies. The Reserve Bank is authorised to grant licences to existing banks as well as to entities that seek to commence banking business. To assess whether a bank is capable of meeting its obligations to depositors, the Reserve Bank may inspect the bank’s books and records. It may revoke a licence in particular circumstances, but only after affording the bank an opportunity to be heard. Banking companies are required to maintain a portion of their assets in liquid form, and the Reserve Bank may order an inspection of any bank at any time it deems appropriate. Moreover, the Central Government may direct the Reserve Bank to conduct an inspection, and the findings of such an inspection may lead to severe remedial measures against the bank. The Reserve Bank may also issue directions governing how a bank conducts its business, may appoint observers, and may instruct the directors of the bank on matters that they should or should not do. While the High Court has the power to impose a moratorium at the request of a banking company, the Reserve Bank can seek to vary or set aside that order if it is not in the interest of the depositors. If the Reserve Bank concludes that the continued operation of a banking company is detrimental to depositors’ interests, it may apply to the High Court for the winding‑up of the bank. Finally, the Court noted that in matters concerning the amalgamation of banking companies through a scheme of compromise or arrangement, the Reserve Bank retains a significant degree of control and oversight.

In this case, the Court observed that the Reserve Bank possessed extensive control and authority over banking companies. The Reserve Bank could approach the Government requesting that a moratorium be imposed on any banking company, and upon such a request the Government was empowered to issue the moratorium order. However, concerning the power to wind up a banking company, the Reserve Bank enjoyed pre‑emptive authority; when it filed an application for winding up, the statutory language obligated the High Court to order the winding up, because the provision expressly stated that “the High Court shall” order the winding up. Additionally, the Government could direct the Reserve Bank to make such an application, thereby enabling the Executive Government to place any banking company into liquidation. The provision in subsection (3)(b)(iii) of section 38 was described as even more severe, because it allowed the Reserve Bank, on its own subjective satisfaction that the continuance of a banking company was prejudicial to the interests of depositors, to file a winding‑up application. Once the Reserve Bank made that application, the High Court had no discretion but to order the winding up. This particular provision had been strongly contested by the appellant, who challenged its validity. The learned Attorney‑General supported the provision on behalf of the Reserve Bank by first drawing the Court’s attention to the factual background of the present dispute. He highlighted that Palai Bank had been given numerous opportunities since 1952 to comply with directions issued by the Reserve Bank. On several occasions the bank had submitted representations, and its directors had met with Reserve Bank officers to explain the bank’s position. Ultimately, on 21 July 1960, the Reserve Bank issued a letter to Palai Bank containing specific directions, which were attached to the correspondence. The letter stated that “the bank should therefore, in the interest of its depositors, remedy within a period of twelve months the features observed in its working.” The letter also informed the bank that, if it wished to make any representation concerning the contents of the inspection report, it could do so within thirty days of receipt of the letter. The appellant complained that the Reserve Bank filed a winding‑up application on 8 August 1960, before the thirty‑day period had expired. The Reserve Bank defended the timing of the application, asserting that it was undertaken for the protection of depositors’ interests and was therefore justified. The Court noted that the test of reasonableness must be applied to each statute individually, and no universal or abstract standard could be imposed across all cases. The Court cited the observation of Chief Justice Patanjali Sastri in State of Madras v. V. O. Row, that the formula of subjective satisfaction by the Government or its officers, when used to override a fundamental right, may be regarded as reasonable only in very exceptional circumstances.

In the judgment, the Court emphasized that any restriction on fundamental rights could be deemed reasonable only within the narrowest possible limits and could not be approved as a general pattern of restriction. The Court referred to the decision in Abdul Hakim v. State of Bihar (2) to illustrate this principle. While recognizing that the legislature generally possessed the best judgment regarding what was beneficial for the community, as stated in State of Bihar v. Kameshwar Singh (3), the Court stressed that the ultimate responsibility for assessing the validity of a law rested with the judiciary, and that the Court must not evade the duty imposed by the Constitution. The learned Attorney‑General submitted two contentions: first, that the reasonableness of the impugned legislation should be evaluated in its specific context rather than by an abstract test; and second, that the absence of judicial scrutiny was not an immutable rule and could be set aside in circumstances where it proved unsuitable or frustrated the purpose of the statute. To support the first contention, the Attorney‑General relied on observations of Patanjali Sastri, C. J., in State of Madras v. V. G. Row (1) where the learned Chief Justice remarked that “The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict.” The Attorney‑General also cited the passage on page 608 in the same report, which noted that, as pointed out by Kania, C. J., quoting Lord Finlay in Rex v. Halliday (1917) A.C. 260, 269, “the court was the least appropriate tribunal to investigate into circumstances of suspicion on which such anticipatory action must be largely based.” The Court reiterated that, in that case, the Chief Justice had observed that a formula based on the subjective satisfaction of the Government with an advisory board reviewing material on which the Government sought to override a guaranteed freedom could be considered reasonable only in very exceptional circumstances, within the narrowest limits, and could not receive judicial endorsement as a general pattern of reasonable restriction. The Court further noted that it did not accept the Government’s claim to exclude judicial inquiry into the underlying facts.

The Court then addressed the second submission of the Attorney‑General by referring to the decision in Virendra v. The State of Punjab (2), which examined the constitutional validity of a Punjab Act prohibiting the editor and printer from publishing any material relating to the “Save Hindi” agitation. The issue before that Court was whether the restrictions imposed were reasonable in view of all surrounding circumstances—that is, whether they were reasonably necessary for the maintenance of public order under Article 19(2) or for the general public interest under Article 19(6). In that case, Das, C. J., observed that the legislature must ask itself who would be the proper authority to determine, at any given time, whether prevailing circumstances warranted restrictions on the freedom of speech and expression. The Court explained that the State Government, charged with preserving law and order and possessing all material facts, was the appropriate authority to investigate the situation, assess its urgency, and decide what anticipatory action was necessary to prevent a threatened breach of peace. The judgment emphasized that the judiciary was unsuitable to gauge the seriousness of the situation because it did not have access to the material facts available only to the executive, and consequently, the determination of the timing and extent of restrictions on the press must be left to the judgment and discretion of the State Government, as reflected in the legislative enactment.

In the judgment of Das, C.J., it was observed that the proper authority to decide, at any particular moment, whether the prevailing circumstances required any restriction on the right to freedom of speech and expression was clearly the State Government, because the State Government bore the responsibility for maintaining law and order, possessed all material facts, and therefore was the most suitable authority to examine the circumstances, assess the urgency of the situation, and determine what anticipatory action should be taken to prevent a threatened or anticipated breach of peace. The judgment further stated that the court was wholly unsuited to gauge the seriousness of such a situation, since it could not possess the material facts available only to the executive Government; consequently, the determination of the time and the extent to which restrictions ought to be imposed on the press had to be left, of necessity, to the judgment and discretion of the State Government, and that was precisely what the Legislature had done by enacting the statute. The passage from Das, C.J., together with a passage from the judgment of Patanjali Sastri, C.J., in State of Madras v. V.G. Row (1), which referred to observations of Kania, C.J., were heavily relied upon by the Attorney‑General in support of his contention that the power conferred on the Reserve Bank with respect to winding‑up, and the mandatory provision for an order of winding‑up by the court, constituted reasonable restrictions; because the assessment of urgency and the measures required to meet that urgency could be made either by the Reserve Bank or by the court. The citations (1) [1952] S.C.R. 597, 607, 608 support this view, and the legislature was said to have correctly given such power to the Reserve Bank, since it held all material facts and was the best authority to investigate the circumstances and evaluate the urgency of the situation. The Court then held that the analogy between Virendra’s case (1) and the present case was wholly inapt. In Virendra’s case (1) there had been an agitation by a section of the public in Punjab that was likely to have serious consequences for public order and the tranquility of the state, necessitating swift measures to control it; the order issued to meet the emergency could remain effective for at most two months and provided for a representation to the Government. By contrast, in the case of a banking company, assuming that an urgency similar to that in Virendra’s case (1) arose and a proper case was made out, the Court would act promptly and make such interim orders as the facts required, for example, appointing a provisional liquidator. The Court also identified one essential difference between V.G. Row’s case (2) and Virendra’s case (1) and the case before it. In the former two cases the executive action of a State Government was challenged; the Court there did not have to render a judicial verdict based on the opinions of the executive but had to determine the constitutionality of action already taken.

In earlier decisions the Court was required to assess the constitutionality of executive actions that had already been taken, and it therefore expressed an opinion that, in the circumstances, no constitutional rights were infringed, without issuing any order, judgment or decree based on the executive’s subjective determination. In the present matter, however, the Court is barred from evaluating the alleged mismanagement and the precarious financial condition of the Palai Bank, nor is it called upon to decide whether the Reserve Bank of India should have lodged an application. The grievance before the Court is that liquidation cannot be ordered until the Palai Bank has been heard and given a chance to meet the allegations contained in the winding‑up petition. Consequently, a statute that permits a banking company to be condemned without being heard, merely on the subjective satisfaction of one of the suitors—here the Reserve Bank—is unconstitutional. It was further submitted that section 38 of the Banking Companies Act is not extraordinary, and that other jurisdictions grant broader powers for winding up banks. The discussion referred to the United States National Bank Act, section 191, which authorises the Comptroller, upon being satisfied of a national bank’s insolvency after a proper examination, to appoint a receiver who shall close the bank and enforce shareholders’ personal liability. That provision also allows the Comptroller to assess stockholders but does not confer judicial power in breach of the Constitution; the Comptroller’s authority is exclusive and not subject to judicial review of matters within his discretion. Although a national bank in the United States is a private corporation operated for profit, its powers and duties are defined and limited by congressional acts that create and liquidate such institutions, and because they serve governmental purposes and national currency, they are often regarded as public or quasi‑public entities. Reference was also made to the American Law Review, volume 92, annotated pages 1257‑58, which examined the constitutionality of the statutory power given to the Bank Commissioner to wind up a bank’s affairs. That source observed that once insolvency is discovered, the statute directs the Commissioner’s actions, including the appointment of a person to wind up the bank, which is not a judicial function but an administrative one, comparable to ordering a board of directors to remove a dishonest cashier. The commentary concluded that the Commissioner’s powers are purely administrative and do not encroach upon the ancient authority of courts to determine the rights of persons and property in specific controversies pending before them.

In this case, the Court observed that the power of courts to determine the rights of persons and property in specific controversies is an inherent judicial function. The Court further referred to Corpus Juris Secundum, volume IX, page 844, paragraph 425, which states that, under certain statutes, banking officials who are appointed to liquidate a bank are not bound by directions of a court. The Court also cited Corpus Juris Secundum, volume 16A, pages 1219‑1220, paragraph 711, which contains a similar observation regarding the same statutes. A particularly important passage from that paragraph was highlighted: “Legislation is in contravention of the guaranty where it takes away one’s property and leaves him no remedy whatever by which he can regain it or obtain redress.” The Court then noted that Corpus Juris Secundum, volume 16, page 506, paragraph 117, explains that the appointment of a receiver does not automatically violate constitutional provisions related to the separation of legislative and judicial powers. Accordingly, when a legislature appoints a receiver to settle the affairs of an insolvent bank, such appointment is not considered a judicial act; however, if the matter is already before a court, the appointment of a receiver becomes a judicial function that is not subject to legislative control. The Court further explained that, in the United States, shutting the doors of a bank without awaiting a court order does not constitute a violation of due process of law. This principle was illustrated by the case titled Guaranty & Surety Company of Scranton v. State of Idaho, where it was held that the State may empower a bank commissioner to close the doors of a state bank found insolvent after examination, without awaiting judicial proceedings, and that such power does not infringe the Fourteenth Amendment. The Court emphasized that the only issue in that case was whether the State could authorize the commissioner to close a bank’s doors, noting that the statute in question did not authorize liquidation except through judicial proceedings, and therefore no liquidation was ordered by an authority other than a court. Another authority relied upon was Bushnell v. Leland, wherein the assessment made upon a stockholder of a national bank by the Comptroller of Currency was permitted as evidence in an action brought by the receiver of a bank to enforce the double‑liability payment imposed on the stockholder.

The Court referred to the decision reported as U.S. 136, 60 L. Ed. 566 (2) (1897) 164 U.S., 684, 41 L. Ed. 598, noting that the authority granted to the Comptroller to make a rateable call upon a stockholder of a national bank was not considered to give that officer judicial power. In the case of Ex parte Johan Chetwood, the Court observed that a receiver of a national bank appointed by the Comptroller of Currency was not an officer of any court but rather an agent and officer of the United States. The Court warned that using American concepts, statutes and case law to interpret Indian law could be hazardous, and therefore such foreign material should be employed with caution, if not with hesitation, because of the differences in the nature of the legal systems and the institutions to which they apply. Counsel for the petitioner, Mr Nambiyar, relied on these foreign concepts and argued that in the United States the right to carry on business was not a fundamental right but a “franchise,” which, by judicial interpretation, had been incorporated into the Fourteenth Amendment, and that the doctrine of “franchise” had no counterpart in the Indian Constitution, citing C.S.S. Motor Service v. State of Madras and Saghir Ahmad v. State of U.P. Similarly, he submitted that in the United States the right to form a corporation was treated as a “franchise” or “privilege” that could be withdrawn. He warned that drawing an analogy between banks in the United States and banks in India, or between the powers exercised by the Comptroller of Currency and a similar authority in India, would likely lead to erroneous conclusions. To support his contention that the procedure for winding up banking companies was reasonable, he pointed out that many other corporations and societies—such as the Life Insurance Corporation, the State Finance Corporation, the State Bank of India, and others—were not wound up under the Companies Act but under special procedures issued by the Central Government, and that these entities were owned by the Central Government, making them incomparable with the respondent company. He further argued that the mere existence of alternative winding‑up procedures for different kinds of corporations did not, by itself, establish the constitutionality of the impugned provision. To reinforce the reasonableness of the provision, he contended that the Reserve Bank possessed special knowledge of financial matters and that special powers had been conferred upon it to protect the country’s financial structure. The learned Attorney‑General relied on observations of Justice Rajagopala Ayyangar in All India Bank Employees’ Association v. National Industrial Tribunal, stating that the genesis of the legislation showed the Government’s intention to reconcile the conflicting interests of preserving the delicate credit fabric of the country while strengthening the apparent credit‑worthiness of banks operating therein.

In the earlier discussion, the Court observed that the legislature attempted to reconcile two opposing interests: on the one hand, there was a need to preserve and maintain the delicate fabric of the nation’s credit structure, and on the other hand, there was a desire to strengthen both the actual and apparent creditworthiness of banks operating in the country. The Court pointed out, however, that this observation arose in a different context, namely the provisions of Section 34A of the Banking Companies Act. Sub‑section (1) of that section conferred immunity, in certain circumstances, on the books and accounts of a banking company against production and inspection in proceedings before an Industrial Tribunal. Sub‑section (2) provided that if, in any proceeding concerning a company other than the Reserve Bank, a question arose as to whether the amount of reserves should be taken into account by the authority before which the proceeding was pending, the authority could refer the question to the Reserve Bank. The Reserve Bank, after considering the principle of sound banking and other relevant circumstances, was required to furnish a certificate to the authority stating that the authority should not take into account any amount as a reserve, and that certificate was to be final. The Court explained that the decision in that case held that the provision achieved a balance between the interests of the parties and the delicate credit structure of the country. Moreover, the provision dealt with the production and inspection of documents and with what facts an Industrial Tribunal could consider, including whether a certificate issued by a bank could be treated as proof of a particular fact. The Court further observed that rules applicable to a quasi‑judicial body such as an Industrial Tribunal, which adjudicates industrial disputes in the pursuit of social justice, might not be suitable for courts of law that determine the rights of a citizen to engage in trade or avocation.

The Court then turned to the case of Sajjan Bank v. Reserve Bank, in which the validity of Section 22 of the Banking Companies Act had been challenged on the ground that it violated Article 19(1) of the Constitution. The Court held that the provision was not ultra‑virulent because the power of granting licences was not vested in a mere officer of the bank, and because the standard for the exercise of that power was expressly laid down in the section itself, rendering the power granted to the Reserve Bank non‑arbitrary. The Court identified the pivotal question for determination as whether a law that requires the High Court to order winding up of a banking company merely because the Reserve Bank is of the opinion that such winding up is necessary can be regarded as constitutional. In other words, the Court examined whether a statute that deprives the Court of its ordinary judicial function to decide a question on the basis of materials placed before it, and instead obliges the Court to decide solely according to the subjective satisfaction of one party to the dispute without affording the other party an opportunity to be heard, could be upheld as a reasonable restriction under the Constitution.

The Court considered whether a provision that prevents a party from being heard at any stage of the proceedings and from proving its defence can be characterised as a reasonable restriction under Articles 19(1)(f) and (g) of the Constitution. The Court posed the question of whether a statute that excludes the operation of the judicial process and forces a court to merely obey the wishes of one party, by giving effect to that party’s subjective satisfaction and thereby relinquishing its own judgment to the opinion of the suitor, can be held valid.

Addressing the origin of judicial power, the Court quoted Chief Justice Griffith in the decision of Waterside Workers’ Federation of Australia v. J. W. Alexander Ltd. (1918) 25 C.L.R. 434, 442. He observed that when humanity moved out of the savage state and established settled communities, it became necessary to create rules to regulate conduct. The enforcement of those rules was entrusted to a person or authority representing the community. Consequently, law‑givers and judges emerged, and as civilisation advanced a distinction was drawn between the various functions of the community. These functions were termed “the judicial power,” distinct from legislative and executive powers. The learned Chief Justice further defined “judicial power” without attempting an exhaustive definition, stating that it includes the power to compel the appearance of a person before the tribunal vested with that authority, to adjudicate between adverse parties on legal claims, rights and obligations of any origin, and to order that the appropriate right be performed in the matter.

The Court then referred to Lord Macnaghten’s observation in Lapointe v. L’Association de Bienfaisance et de Retraite de la Police de Montréal [1906] A.C. 535, 539. He condemned the performance of judicial functions by persons who are not judges when they follow a procedure contrary to the rules of society and, above all, contrary to the elementary principles of justice.

Emphasising the importance of the judicial process, the Court cited Chief Justice Patanjali Sastri in Ram Prasad Narain Sahi v. The State of Bihar (1953) S.C.R. 1129, 1134. That case involved a dispute between the State of Bihar and a private individual concerning the settlement of lands belonging to the Bettiah Raj. The Chief Justice observed that such a dispute is purely between private parties and must be determined by duly constituted courts, which in every free and civilised society are entrusted with the crucial function of adjudicating disputed legal rights after observing well‑established procedural safeguards. These safeguards include the right to be heard, the right to produce witnesses and other procedural guarantees. The law provides this protection equally to all persons, and the Constitution, under Article 14, prohibits any State from denying such protection to anyone.

Although the question in that case was framed under Article 14, the observation underscored the significance of the judicial process in disputes between the State and a private individual. The learned Chief Justice further warned at page 1133 of the report of the dangers inherent in special enactments that, in a system of government dominated by political parties, deprive particular named persons of their liberty or property.

In the case of Mahant Sri Jagannath Ramanuj Das versus the State of Orissa, the petitioner challenged certain provisions of the Orissa Hindu Religious Endowments Act that concerned the preparation of a scheme for the administration of endowed property. The contested provisions allowed a scheme to be prepared not by the civil courts or under the Civil Procedure Code, but by a Commissioner who was described only as an administrative officer, and they did not provide any mechanism for appealing the Commissioner’s order. Justice Mukherjea, who later became a judge of the Supreme Court, observed that allowing an executive officer to settle a scheme for a religious institution without the involvement of a judicial tribunal represented an unreasonable restriction on the property rights of the religious superior, whose office was combined with the religious role. Accordingly, he held that sections 38 and 39 of the Act were invalid. This reasoning was later reaffirmed in the decision of The Commissioner of Hindu Religious Endowments versus Sri Lakshmindra.

Subsequently, the Court examined the case of Sri Sadasib Prakash Brahmachari versus the State of Orissa, which involved the same Act after it had been amended to address the earlier judgment. Although the amendment retained the Commissioner as the authority responsible for preparing the scheme, it introduced a right of appeal directly to the High Court against the Commissioner’s determination. The Court noted that, from the litigant’s perspective, an appeal to the High Court did not amount to a separate independent suit, but the crucial question was whether the provision allowed the affected person a reasonable opportunity to present the entire case before the original tribunal and whether the person retained a regular right to appeal to an ordinary constitutional court to correct any errors of the first‑instance tribunal. The judgment emphasized that the Commissioner was required to be a member of the judicial service and that the enquiry before the Commissioner had to be conducted in a manner analogous to the trial of suits, adhering to the procedural rules of the Code of Civil Procedure. The Court concluded that, under these circumstances, framing a scheme in this way did not constitute an unreasonable restriction on the Mahant’s rights under Article 19(1)(f) of the Constitution. It was also observed that the right of appeal provided by the amendment was expressed in broad and general terms, thereby ensuring adequate judicial oversight.

The Court noted that the questions before it could involve both factual and legal aspects and might extend beyond the merits of the scheme to include fundamental issues whose resolution was inherent in the very design of the scheme. It recalled the Privy Council’s pronouncement in Attorney‑General for Australia v. The Queen and the Boilermakers’ Society of Australia, where the Council held that the role of an industrial arbitrator lies wholly outside the sphere of judicial power and constitutes a distinct category of function. Quoting Viscount Simonds at page 315, the Court reproduced the observation that in a federal system the absolute independence of the judiciary serves as the constitution’s bulwark against encroachment by either the legislature or the executive, and that combining executive and judicial authority in a single body would erase a vital constitutional safeguard. The learned Attorney‑General had stressed that the Reserve Bank, as a body of specialist bankers, might be better placed than a judicial tribunal to decide when the continued existence of a banking company harms the interests of its depositors, citing the case reported in 1957 A.C. 288. The Court rejected this contention as untenable, emphasizing that the liquidation of banking companies, like that of any other company, is a judicial function squarely within the jurisdiction of the courts. No credible suggestion has ever been made that courts are incapable of adjudicating technical matters specific to banking institutions, nor that judicial determination of such matters is any less desirable than adjudication of other disputes. To deny a citizen the right to have his claims decided by an independent court would contravene the rule of law in a democratic society, and it would be contrary to the interests of the rule of law to leave the question of a bank’s solvency to the subjective opinion of an executive body, even if that body possesses banking expertise. The Court found the remarks of Lord Morton of Henryton in Baldwin & Francis Ltd. v. Patents Appeal Tribunal relevant, wherein he warned that it would be regrettable in modern times, when many tribunals handle scientific issues, to prevent courts from reviewing alleged errors of law merely because they lack knowledge of certain technical terms. The Court also referred to the American decision Ohio Valley Water Company v. Ben Avon Borough, 1920 U.S. 287, which held that depriving courts of the power to determine confiscation questions according to their independent judgment amounts to a denial of due process of law.

The Court observed that authorities such as the United States case reported at 663, 679, (2) (1920) 253 U.S. 287, 64 L Ed. 908, and the commentary in Halsbury’s Laws of England, volume 7 (Simonds Edition) at page 198, affirm a fundamental principle that every individual has the right to have any dispute affecting him brought before a judicial tribunal and decided in accordance with the principles of natural justice; consequently no party should be condemned unheard or have a decision rendered against him unless he has been given a reasonable opportunity to present his case.

It was submitted by the appellant that the Reserve Bank functions wholly as an executive body, and therefore mandatory provisions such as section 38(1) and section 38(3)(b)(iii) of the Banking Companies Act effectively place the decision on liquidation of banking companies in the hands of the Executive. Under section 7 of the Reserve Bank Act the Reserve Bank is required to act in accordance with the orders of the Government, and section 8 provides that all directors of the Reserve Bank are nominated by the Government. Moreover, section 38(2) obliges the Reserve Bank to apply for the liquidation of a bank when it is so directed by the Central Government; consequently any opinion formed by the Reserve Bank concerning the insolvency or otherwise of a bank is necessarily an executive determination. When section 38(1) mandates that the court must order the winding up of a banking company upon an application made by the Reserve Bank, the effect is a substitution of executive power for judicial determination, thereby undermining the judicial decision‑making that is a core feature of the rule of law.

The Court then quoted Stephen’s Commentaries on the Laws of England, volume III, page 565, which states: “The importance of the judicial element in our Constitution can hardly be exaggerated, for it rests with the Courts to ensure the conformity of Government with law… The ‘Rule of Law’ which Dicey held to be a leading principle of our Constitution does not involve the decision of every dispute by Courts of law. But it does imply that all authorities in the State act under the eye of the Courts, and are liable to have the legality of their conduct inquired into.”

Applying these principles to the present matter, the Court noted that the Reserve Bank alleged that Palai Bank was in a very precarious situation, with assets insufficient to pay its depositors in full or to meet its liabilities. The Reserve Bank further claimed that on several occasions it had issued directions to Palai Bank to conduct its affairs in the manner required by the Reserve Bank, and that Palai Bank had been given numerous opportunities to explain the defects and irregularities in its operations and to comply with those directions, but had failed to do so. The allegation that the bank was in

The appellant contested the allegation that the bank was in a precarious condition, unable to meet its obligations and lacking liquid assets to repay its depositors. The appellant argued that the High Court could have examined this issue if it possessed the requisite jurisdiction, and that the denial of such judicial scrutiny deprived the bank of a proper legal determination. According to the appellant, this deprivation raises a constitutional question regarding the validity of the impugned statute. Section 38 of the Banking Companies Act provides that when the Reserve Bank is of the opinion that the continued operation of a banking company is detrimental to the interests of depositors, it may apply to the Court for an order of winding up. The statute mandates that the Court must issue the winding‑up order regardless of whether the bank can present a satisfactory defence. The appellant submitted that the requirement to place a judicial seal on the Reserve Bank’s opinion effectively negates the exercise of independent judicial process. It was further submitted that, although the Reserve Bank is expected to inspect the bank’s affairs, issue directions, solicit explanations and hear the bank before taking action, the statute does not compel the Reserve Bank to follow those procedural steps.

The appellant identified two fundamental defects in the challenged provision. First, the power granted to the Reserve Bank to seek a winding‑up order rests solely on its subjective satisfaction that the conditions enumerated in section 38 exist. Second, the law obliges the High Court to grant the winding‑up order without ever examining whether the factual basis of the Reserve Bank’s application is true. In assessing whether a statutory restriction is reasonable, the Court must consider the purpose of the statute, the evil it seeks to remedy, and must balance the rights of the individual against the broader public interest. The Court must determine whether the restriction is appropriate, fair and necessary, and must reject any restriction that is arbitrary or unnecessary for achieving the statutory purpose. The appellant asked whether the circumstances of the present case are so compelling that, unless the provision requiring a Court to order winding up based solely on the Reserve Bank’s satisfaction is upheld, the public interest cannot be protected. The appellant further suggested that it may be legitimate to examine whether the High Court, which normally possesses jurisdiction over winding‑up matters, is either incompetent or procedurally ill‑equipped to assess the allegations against a banking company. The appellant emphasized that the reputation of a bank is extremely sensitive, depending on public confidence in the honesty of its management and its solvency, and noted that there is nothing inherently unusual about the ordinary business of a banking institution that would justify an automatic winding up on the Reserve Bank’s subjective view.

In this case, the Court observed that the statutory scheme required a banking company to be ordered to wind up solely on the subjective satisfaction of the Reserve Bank. While the Court recognised that the Reserve Bank possessed considerable expertise and extensive facilities for investigating the affairs of banking companies in India, it held that such expertise did not create a presumption that the Reserve Bank’s view that any banking institution should be liquidated was invariably correct. The Court emphasised that the Reserve Bank could act mistakenly or even negligently, and that it might be instructed by the Central Government, for its own reasons, to seek the liquidation of a bank. The Court noted that, under the Constitution, the courts served as custodians of citizens’ fundamental rights, but that this extraordinary legislation transformed those custodians into instruments of the Reserve Bank for imposing an order that, on its face, destroyed a guaranteed fundamental freedom. The Court reiterated that legislative and executive actions were subject to judicial review within well‑defined limits, yet by section 38(1)(b) read with clause (iii) the court was not only deprived of its constitutional functions but also commanded to assist in defeating a fundamental freedom of banking companies. The impugned provision made the Reserve Bank both complainant and judge in its own cause, authorising it, on the basis of its subjective satisfaction regarding the existence of a statutory condition, to demand that the High Court order liquidation without any inquiry into the sufficiency or even the existence of the material underlying that satisfaction. The Court described this arrangement as an absolute negation of the rule of law, underscoring that the foundation of the judicial system required that no person be condemned unheard, regardless of how strong the circumstances against him might appear. The Court explained that a citizen must be informed of the acts alleged to merit punishment, be given an opportunity to deny the correctness of the charge or to present mitigating arguments, and be allowed to persuade the authority imposing the penalty that a different order was appropriate. By a single legislative act, the Court held, all these protections were destroyed, rendering the Reserve Bank’s satisfaction conclusive for determining whether a banking company could continue to exist. The Court warned that it would be a tragedy if, under this and similar legislation, citizens were convicted of offences, penalised, had their property seized, and saw their rights trampled without any judicial enquiry, merely because the law required the courts to lend their aid in imposing the authority’s decision.

The Court observed that invoking the courts merely to lend their aid to the exercise of executive authority creates a mere façade of judicial involvement while, in reality, the power exercised remains purely executive. It was noted that the executive authority, which possesses the power to call upon the courts for assistance, is an expert body that performs a significant function, either directly or indirectly, in the governance of the State. Nevertheless, the Court held that even if such a body is highly respected, a provision of law that imposes restrictions on a citizen’s fundamental right based solely on the executive’s subjective satisfaction as to the existence of a particular state of affairs, and that consequently deprives the citizen permanently of his right or property, is wholly unreasonable. The Court further stated that a challenge to the constitutionality of a statute that infringes a fundamental right cannot be dismissed on the assumption that the power to impose penalty or punishment is vested in the executive, which will, it is alleged, exercise that power only in proper cases and will not be abused. In keeping with the larger constitutional design, the framers have been averse to conferring autocratic power and have sought to protect citizens by guaranteeing fundamental freedoms and by providing safeguards against infringement of those freedoms by either legislative or executive action. While counsel for the Palai Bank vigorously contested the truth of the Reserve Bank’s allegations, the Court was prepared to accept, for the purposes of its analysis, the proposition that the affairs of the Palai Bank were mismanaged, that a mounting run on the bank had taken place, and that the bank was, in practical terms, insolvent. The Court emphasized that the validity of a statute must not be judged on the basis of the propriety or beneficent effects of the executive’s actions in a particular case. The statute in question was found invalid because it excluded any opportunity for judicial investigation into the fairness, propriety and reasonableness of executive action that resulted in the deprivation of fundamental rights. The Court said it was unnecessary to consider the steps alleged to have been taken by the Reserve Bank from time to time to obtain information, to give advice and direction, or the claim that the winding‑up application was filed because the bank’s condition deteriorated daily, as these matters remain contested. Ordinarily, the function of the judicial power is to examine whether a banking company should continue to operate or be liquidated. By the impugned provision, that exercise of judicial power was excluded. The Court held that such exclusion was not grounded in any inadequacy of judicial exercise nor in any compelling public‑interest circumstance, and that it was invalid because, when viewed in light of its impact on the citizen’s fundamental right, the statute was unreasonable. As demonstrated, under the Constitution the courts serve as the bulwark for protecting citizens’ rights.

The Court observed that judicial review serves as a safeguard against the whims, negligence or mistakes of the executive and also protects against the high‑handed conduct of one party towards another. It stressed that depriving a person of the right to approach the courts constitutes an unreasonable restriction on a fundamental liberty. While acknowledging that the statutory scheme does not bar an appeal to this Court, the Court pointed out that the remaining right of appeal is effectively meaningless. According to the Court, if the challenged provision were held to be constitutional, the judiciary would be forced to merely follow the opinion of the Reserve Bank and would have to relinquish its own judicial function in favour of the view of an executive body.

The Court went on to state that Section 38 imposes an unreasonable limitation on the right of Palai Bank to conduct its business and, as a result, is unconstitutional. The Court expressly refrained from commenting on any allegation of hostile discrimination that might arise from the prescribed procedure, but it observed that a statute found to be unreasonable would be liable to be declared invalid. Consequently, the Court concluded that the appeal must be allowed and the order passed by the High Court set aside. In line with the majority’s opinion, the appeal and the writ petition were dismissed with costs, one set only, and the appeal and petition were officially dismissed.