Government Shares; Pattanakkad Service Co-Operative Bank Vs. Joint Registrar of Co-Operative Societies [Kerala High Court, 29-06-2016]

Kerala Cooperative Societies Act, 1969 – Sections 23, 24 & 32(1) –  Government Shares – Restrictions on transfer of share or interests –  Restriction on withdrawal of shares – the Bank or its managing committee is not entitled as of right to return shares – Restriction is imposed for withdrawal of shares- If there is an agreement executed by and between the Bank and the Government, the parties are guided by the said agreement also.

# Government Shares


IN THE HIGH COURT OF KERALA AT ERNAKULAM

SHAJI P. CHALY, J.

W.P.(C). No.20316 of 2016

Dated this the 29th day of June, 2016

PETITIONER(S)

THE MANAGING COMMITTEE PATTANAKKAD SERVICE CO-OPERATIVE BANK LTD.NO.1144, PATTANAKKAD P.O., CHERTHALA-688 531, ALAPPUZHA DISTRICT, REPRESENTED BY THE PRESIDENT.

BY ADV. SRI.GEORGE POONTHOTTAM

RESPONDENT(S)

1. THE JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES (GENERAL) OFFICE OF THE JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES, ALAPPUZHA-688 001. AND ANOTHER

JUDGMENT

This writ petition is filed by the managing committee of a Co-operative Bank namely Pattanakkad Cooperative Bank Ltd., No.1144, seeking to quash Ext.P6 notice issued under

# Section 32(1) of the Kerala Cooperative Societies Act

(hereinafter called ‘the Act’) and for other related reliefs.

2. Material facts for the disposal of the writ petition are thus:-

Petitioner, managing committee was elected to office on 14.7.2012. The President of the committee, contends, petitioner, was removed through a no confidence motion on 9.2.2016 but he did not demit his office. Therefore, by operation of law, his office having vacated, a new committee of office bearers were elected on 15.02.2016. Bank has a deposit of Rs.59 crores and loan outstanding of more than Rs.68 crores. There are no government shares, loan or financial assistance or guarantee by the Government or any Board or Institutions constituted by the Government as on 7.6.2016.

3. That apart it is contended that, transaction of the Society was subjected to concurrent audit and statutory audit by auditors appointed by the Departments. Apart from the statutory audit, bank had undergone periodical inspection by the inspectors of the department. Bank being affiliated to the District Co-operative Bank, Alappuzha is also subjected to periodical inspection by senior level officers of the District Co-operative Bank. But, however, no major defects have been pointed out by the auditors ever since 2006 till 2015. The unit inspectors or the departmental officers also did not point out any defect in the working of the Bank.

4. It is contended that, for the first time, the Unit Inspectors, Pattanakkad has reported falsification of accounts and misappropriation of funds by the Secretary, Senior Clerk and Attender and thereupon recommended for a Section 65 enquiry under the Act to the Joint Registrar of Co-operative Societies, Alappuzha and also recommended initiation of criminal action, evident from Ext.P2. Based on Ext.P2 report, three person holding the above specified posts were placed under suspension by the managing committee of the society on 18.11.2015. It is thereupon, alleging connivance of the President, no confidence motion was moved against the president as he refused to resign from the post as desired by the managing committee members of the society. On the basis of a decision by the managing committee, the vice president, nominated as the President of the managing committee, filed W.P.(C) No.39614/2015 before this Court seeking direction for appointment of a Special Investigation Team to enquire into the alleged misappropriation of funds by the suspended employees and the said writ petition is pending consideration before this Court. A complaint is also preferred before the then Minister of Co-operation, evident from Ext.P3 and thereupon an order was issued to entrust the investigation with the crime branch wing of the State police and accordingly, a crime was registered. According to the petitioner, investigation is complete and report is awaited. The new office bearers, had also filed ARC No. 335/2015 in connection with the misappropriation and secured an order of attachment, evident from Exts.P4 and P5 respectively. Statements are also made in the writ petition with respect to the improvements made by the petitioner committee in the matter of securing deposits for the betterment of the business of the Bank.

5. Apparently, as suggested in Ext.P2, Section 65 enquiry was conducted by the unit inspectors and has given a report to the Joint Registrar on 12.5.2016 and based on the same Ext.P6 notice under Section 32(1) of the Act is issued. It is thus aggrieved by Ext.P6 notice, petitioner has approached this Court contending that entire action of the first respondent as per Ext.P6 is without jurisdiction.

6. First respondent has filed a statement refuting the allegations, statements and claims made by the petitioner. The crux of the contention put forth in the statement is that, Bank had availed various assistance from various sources which includes Government shares, of Rs. 1,00,000/- each during 2012-13 and 2013-14. Apart from the share amount of Rs.5,000/- from the National Co-operative Development Corporation (NCDC), bank has also availed Government grants and subsidies amounting to Rs. 1,08,625/- during 2013-/14. The Bank has also received NABARD loan amounting to RS.1,10,10,000/- during 2013-14. That part, it is contended that in anticipation of the proceedings under Section 32 of the Act, petitioner without any bonafides and with the malicious intention to avoid action under Section 32 of the Act, refunded the Government share capital contribution of RS. 2,00,000/-, and Rs. 5,000/- received as NCDC share. As per the Government orders regulating the payment of Government share capital of Co-operative Societies, the society shall utilize the share capital contribution for the purpose of strengthening its share capital, for availing finance for issuing loans to its members. The society is under an obligation to refund the Government contribution only in 10 equal annual instalments. The first instalment falling due on the sixth anniversary from the date of drawal of the amount by the society. But, in anticipation of the proceedings the share capital towards the Government and NCDC was refunded in whole on 2.6.2016 as per resolution of the board No.308 dated 14.5.2016. It is also contended that, the loan awarded by NABARD as well as the Government subsidy are still outstanding. It is also contended that, the society has suffered huge loss and damage of assets due to the breech of trust, wilful negligence and malafide action on the part of the Board Members as well as the employees of the Bank and therefore, the action initiated pursuant to Ext.P6 notice is legal and in order.

7. Petitioner has filed a reply to the said statement filed by the first respondent reiterating the stand adopted in the writ petition. That part it is stated that, an amount of Rs.26,75,15,882.94/-were misappropriated, is a totally misleading statement and the estimate loss of misappropriation is less than Rs.10 crores and those are misappropriations made while the previous committee was in office. According to the petitioners, the said amount was secured by attaching the property. Other contentions are also raised to persuade that, action pursuant to Ext.P6 is unjustifiable. However, it is admitted that, the Government share was there in the society amounting to Rs.2,00,000/-. But, the same has been treated as a ‘B’ class shares and therefore it is up to the society to return the shares as may be decided by the society. It is also the contention that, the society has absolute freedom to return the same since ‘B’ class shares have no voting right. Petitioner have also produced Exts.P8 and P9 relevant page of the audit certificates of the year 1973-74 and 1993-94. That part, Ext.P10 is produced additionally, alleged to be a certificate showing utilization of financial assistance of the government for an amount of Rs, 1,00,000/- for the period 2013-14 along with Ext.P11, a form of alleged agreement executed.

8. Additional second respondent, a member of the society was impleaded, and in the affidavit filed along with impleading application, justified the action under Ext.P6 initiated by the first respondent and it is contended that, there was huge misappropriation of funds of the Bank which necessitated action on the part of the first respondent by invoking the power conferred under Section 32 of the Act. It is contended that ‘B’ class shares having the value of Rs.100/- each is alloted to the Government and the same is reflected in the audited balance sheet of the society apart from Rs.5000/- shares of NCDC. In all other respects, additional second respondent has supported the statement filed by the first respondent.

9. Heard learned counsel for the petitioner, learned Government Pleader and learned counsel appearing for additional second respondent.

10. Learned counsel for the petitioner make his submissions by relying on the contentions raised in the writ petition, reply and additional affidavit and documents produced along with the writ petition. The crux of the contention advanced by learned counsel for the petitioner is that, action pursuant to Ext.P6 is without jurisdiction, pursuant to the bar created under 3 rd proviso to Section 32 (1)(d) which read thus:-

“Provided also that the board of a co-operative society shall not be superseded or kept under suspension where there is no Government share holding or loan or financial assistance or any guarantee by the Government or any Board or Institutions constituted by the Government.”

11. The receipt of Rs.2,00,000/- from the Government, which was converted in to shares of Rs.100/- each and thus Government holding shares is admitted. However, the contention of the petitioner relying on Exts.P10 and P11 is that, the said amount was returned to the Government and therefore, presently the Government has no manner of interest in the Bank. Therefore, according to the learned counsel, Ext.P6 cannot be sustained under law since there is no power vested with the first respondent to initiate any proceedings under Section 32 of the Act, by virtue of the prohibition referred to supra.

12. Per contra, learned Government Pleader contended that, having admitted the interest of the Government, consequent to the shares held by it based on the contribution of Rs.2,00,000/-, first respondent has every power and authority to exercise the power under Section 32(1) of the Act. It is also contended by Government Pleader that the amount was returned by the petitioner as per resolution dated 14.5.2016 on 2.6.2016, obviously realising that action under Section 32(1) of the Act will clothe the managing committee with the liability of misappropriation. That part it is also the contention of the government that, the managing committee is not at liberty to return the shares at its sweet will, pleasure and volition. Withdrawal of shares according to learned Government Pleader is guided by Sections 23 and 24 of the Act. Taking cue from the statutory provisions learned government pleader contended that there is no power vested in the managing committee of the bank to return the shares. Learned counsel for additional second respondent supported the arguments advanced by the learned Government Pleader. That apart it is also contended that, an enquiry was conducted under Section 65 of the Act for ascertaining the adverse impact of misappropriation of money by the employees at the connivance of the managing committee, action is perused under Section 32 (1) of the Act.

13. Taking into account the rival submissions made across the bar and perusal of pleadings and documents, the sole question to be considered is whether interference of this Court under Article 226 of the constitution of India is required at this stage of the proceedings, to Ext.P6 notice. Admittedly, Ext.P6 is a statutory notice issued under Section 32(1), wherein petitioner is directed to file a reply to the same in order to enable the first respondent to arrive at a correct conclusion in the subject matter. True, as provided under 3 rd proviso to Section 32(1)(d) there is a bar created from initiating action for supersession, if there is no government share holding or loan or financial assistance or any guarantee by the Government or any board or institution constituted by the Government. But, here is a case where it is the specific contention of the first respondent that, there is government share holding of Rs.2,00,000/- in the Bank. But, to counter the said contention petitioner has contended that, the money is returned to the Government and therefore, the question remains is when Ext.P6 notice was issued, was the Government holding any share. As discussed earlier, transfer of share is regulated as per Sections 23 and 24 of the Act. It read thus:-

# 23. Restrictions on transfer of share or interests

(1) The transfer of a share or interest of a member in the capital of a society shall be subject to such conditions and restrictions as to the maximum holdings as are specified in section 22

(2) No transfer by a member of his share or interest in a society shall be valid unless

(a) the member has held such share or interest for not less than three years; and

(b) the transfer is approved by the committee of the society.

# 24. Restriction on withdrawal of shares

Subject to the other provisions of this Act, no withdrawal by a member of his share in a society shall be valid unless-

(a) the member has held such share for not less than three years; and

(b) such withdrawal is in accordance with the bye-laws of the society.”

14. Therefore, on evaluation of the factual circumstances and the law on the point it is categoric and clear that the Bank or its managing committee is not entitled as of right to return shares. Restriction is imposed for withdrawal of shares. There is no power enabling the petitioner to return the shares suo motu or by its voluntary action. Therefore, apparently it is vivid and clear that the attempt of the petitioner was to get over the apprehended proceedings under Section 32 of the Act, which thus means since section 65 enquiry on the basis of Ext.P2 report was going on, petitioner could comprehend that, it is likely to end in proceedings under Section 32(1) of the Act.

15. Learned counsel for the petitioner has a contention that, pursuant to Ext.P11 agreement, society was at liberty to return the share capital contribution in 10 equal annual instalments of Rs.10,000/- starting from sixth anniversary of the date of drawal of the amounts of the society and subsequent instalments on the corresponding date of the succeeding years. Taking advantage of the said provision, learned counsel for the petitioner contended that, the Bank was at liberty to return the amount in one lump and foreclose to the share transaction. But, the petitioner could not point out any provision either under Ext.P11 or under the Act or Rules enabling the society to return the shares in one lump and foreclose the transaction. In my view, government contribution or shares are provided and secured in a society not only to support the society with financial assistance but also ensuring its functioning properly and legally. On a perusal of the restriction on transfer of shares under the provisions of the Act, it is clear that, the petitioner is not at liberty to return the shares to suit its convenience. This is the exact case put forth by the Government as well as the additional second respondent.

16. That part, taking into account the factual situation and the contents of the documents produced shows that, the subject matter of Ext.P6 is to be considered by the first respondent after receiving a reply from the petitioner. Several facts are involved, though disputed by the petitioner, relevant to be considered by the first respondent.

17. Learned Government Pleader has invited by attention to Section 2(aa) of the Act and contended that even if the shares were withdrawn or returned, once government has assisted the society in the form of share capital or any other financial support, the government is vested with powers to initiate action under Section 32(1) of the Act. Section 2(aa) read thus:-

“2(aa) “assisted society” means a co-operative society which has received the Government assistance in the form of share capital, loan, grant or any other financial assistance or any guarantee by the Government or from Boards constituted by the Government for repayment of loan, interest or deposits;”

18. Therefore, taking cue from the phraseology used “which has received” according to learned government Pleader is a circumstance taken care of to mean, even if the share was withdrawn or returned the first respondent is vested with power to initiate action under Section 32 of the Act. But, to counter the said argument, learned counsel for the petitioner has submitted that from the 3 rd proviso to Section 32(1)(d) it is clear that in order to initiate action there should be share of the government or financial support at the time of initiating action. Any how, the financial support of the Government is reflected even from the contentions of the petitioner itself. The return of amount on 2.6.2016 is also admitted. Sections 23 and 24 deals only with withdrawal of shares by the respective member. Therefore, petitioner cannot be heard to say that consequent to the return of money government has lost every power and the 3 rd proviso comes into play and protect the petitioner.

19. Reckoning the factual and legal circumstances discussed above, I am of the considered opinion that the petitioner is not entitled to return the shares by its own volition. If there is an agreement executed by and between the Bank and the Government, the parties are guided by the said agreement also. Therefore, in my considered opinion, action pursuant to Ext.P6 is with jurisdiction conferred on the first respondent under Section 32 of the Act. Therefore, I hold that Ext.P6 issued by the first respondent is in accordance with law and notice impugned has no manner of arbitrariness, illegality or other legal infirmities susceptible to judicial review under Article 226 of the Constitution of India.

20. However since the time granted under Ext.P6 for submitting reply expired on 16.6.2016, I am of the opinion, that same can be extended till 7.7.2016 enabling the petitioner to appear before the first respondent and file suitable reply in terms of Ext.P6.

Resultantly, writ petition fails and accordingly dismissed, subject to above observation.

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