Joseph Vellikunnel v. RBI

Joseph Kuruvilla Vellukunnel v.
Reserve Bank of India, 1962 Supp (3) SCR 632
Appellant – Palai Central Bank Ltd
Respondent – Reserve Bank of India
PRELIMINARY DETAILS OF THE CASE
Case No. Civil Appeal No. 487 of 1961
Jurisdiction Supreme Court of India
Case Decided on 07th March 1962
Judges B.P Sinha CJ, J L Kapur, M. Hidayatullah, J.C

Shah and J.R Mudholkar JJ (5 Judge bench)
Legal Provisions involved S.38(1) and(3)(b)(iii) of Banking companies

Act 1949, Companies Act 1956, Constitution
of India
Case Summary prepared by Jinta Jaimon

Student of B. A L.LB
Christ University, Delhi NCR
Pertains to – Winding up of a Banking company by the High Court on application by Reserve

Bank of India
INTRODUCTION
The Reserve bank also called as the banker’s bank is the sole authority to supervise all the
banking companies in India. Section 38 of the Banking Companies Act which gives RBI the
power for winding up a banking company was challenged in the given case.
RELEVANT LAWS
1. S.38(1) and (3)(b)(iii) of Banking companies Act 1949,

2. S.433 of Companies Act 1956
3. Art 14 and 19 (1)(f) and (g) of Constitution of India
FACTS AND SUBMISSION
 In accordance to the powers vested to it by the Banking companies Act, 1949 and the
Reserve Bank of India Act 1934 the Reserve Bank had been inspecting the Palai Central
Bank Ltd and warning the bank that its business was conducted in a manner harmful to
the interests of its depositors.
 After run on several branches of the Bank. The Reserve Bank was of the opinion that the
Palai Bank was not in a position to pay its depositors in full and further running of the
bank was prejudicial to the interest of the depositors.
 In the year 1960 the Reserve Bank made an application in the High Court of Kerala
under S.38 (3)(b)(iii) of the Banking Companies Act, 1949 read with the Companies Act
1956 for winding up of the Palai Central Bank Ltd.
 After hearing the Reserve Bank, the Palai Bank and the creditors, the High Court passed
an order allowing the application of the Reserve Bank and directing the winding up of the
Palai Bank. Aggrieved by the decision the Appellants (Palai Central Bank) filed an
application in the Supreme Court hence the present appeal.
ISSUES
1) Whether the powers conferred to RBI by the section 38 (1) and 3 (b) (iii) of the BR
Act 1949 arbitrary under Article 14 and 19 (1) (f) and (g)?
2) Whether the provision breach Art 301 of the Constitution;
3) Whether the provision gives power to executive to be the sole decision-making body
for winding up and makes the Court powerless?
ARGUMENTS OF APPELLANT (PALAI BANK)
 It was contended that ss. 38 (1) and (3) (b) (iii) of the Banking Companies Act
contravened Articles 14 and 19(1) (f) and (g) of the Constitution and hence is void
because they permitted discrimination between a banking company and any other
company by prescribing different laws for their respective winding up in addition to
the unreasonable restriction which is conferred by the provision on the right to carry
on banking.
 The said provision denied access to the courts as under S.433 of the Companies Act
1956 when application for winding up of a company was made the High Court had to
conduct a fair trial before passing the order for winding up of the company and there
was a right to appeal against the decision if the said decision was adverse to the
company.
 But the procedure laid in s.38 of the Banking Companies Act 1949 made the Reserve
Bank the sole judge to decide whether the affairs of a banking company were being
conducted prejudicial to the depositors’ interest or not. The court under the provision
had no option but to pass an order for winding up of the banking company when the
application was filed.
 Since the opinion of the Reserve Bank or the Central Government is not justiciable
and there is no appeal against the decision of the Reserve Bank or of the court acting
on the application of the Reserve Bank any Banking company can be suppressed by
the Reserve Bank or by the Central Government and the Courts are powerless.
 It was contended by the appellant that ss.38 (1) and 3 (b) (iii) were ultra vires as it
was in conflict with Art.301 of the Constitution.
ARGUMENTS OF RESPONDENT (RBI)
 Attorney-General appearing for the respondents contended that the Palai Bank was
inspected frequently for ten years and the reports of the inspecting officers were made
available to the Palai bank for information and for giving proper explanation.
 The action taken was after numerous opportunities to the Palai Bank to mend matters.
Even in 1960 the Reserve Bank gave a year's time for improvement of the bank but
immediate action had to be taken in view of the large number of depositors who had
lost the confidence in the bank and made a run for the money.
 It was stated by the Attorney General that the Reserve Bank could be blamed for
delaying the action but not for taking a swift action. The position of the Reserve Bank
as a responsible body makes it the proper authority to make such a significant
discussion requiring immediate action hence the Reserve bank can not only be
questioned but should not be open to any doubt.
 banking companies are different from an ordinary profit-making company hence it
constitutes a different class and special laws dealing with their winding-up cannot be
described as discriminatory. Therefore, the law is neither discriminatory nor
unreasonable.
RATIO DECIDENDI
 An examination of the Banking Companies Act reveals two things the first is that the
whole purpose of the Act is to secure the interests of the depositors. The second is that
the Reserve Bank is the medium by which this intent is to be achieved. The Act
makes the Reserve Bank the authority to sanction, permit, report, advise, control,
direct, license and prohibit all the activities of a banking company.
 The legislature considers that in consistent with its position as a central bank and with
its duties the Reserve Bank also called as the Banker’s bank must have a decisive
voice in certain matters. It is in this context and setting that the provisions of Sections
38(1) and (3)(b)(iii) of the Banking Companies Act 1949 must be looked at .
 The legislature achieved its objectives through the Reserve Bank because of its
special powers and advantages to act promptly and effectively. The courts were
required by law to be guided in certain matters by the opinion of the Reserve Bank .In
the matter of Court’s disposal of winding-up cases relating to banking companies a
special procedure was enacted in Part III-A of the Banking Companies Act calling for
RBI’s assistance.
 There may be occasions and situations in which the legislature with reason may think
that the investigation and solving of an issue may be left to an expert executive like
the Reserve Bank rather than to Courts without declaring the law void.
JUDGMENT
Sections 38(1) and (3)(b)(iii) of the Banking Companies Act are neither discriminatory nor
unreasonable, and cannot be declared void under Articles 14 and 19 of the Constitution. As
the provisions are mainly in the public interest they cannot be declared beyond power (ultra
vires) under Article 301 because they are protected by Article 302 of the Constitution. Hence
the appeal was dismissed.
CONCLUSION
Through the landmark decision the role and functions of RBI was explained and RBI as a
regulatory body was reestablished. The provision under the Banking Companies act was held
valid and the court held that role of the judiciary and the executive are separate and the
provision does not dilute the power of both the organs.

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Joseph Kuruvilla Vellukunnel v.

Reserve Bank of India, 1962 Supp (3) SCR 632

Appellant – Palai Central Bank Ltd

Respondent – Reserve Bank of India

PRELIMINARY DETAILS OF THE CASE

Case No. Civil Appeal No. 487 of 1961

Jurisdiction Supreme Court of India

Case Decided on 07th March 1962

Judges B.P Sinha CJ, J L Kapur, M. Hidayatullah, J.C

Legal Provisions involved S.38(1) and(3)(b)(iii) of Banking companies

Case Summary prepared by Jinta Jaimon

Pertains to – Winding up of a Banking company by the High Court on application by Reserve

1. S.38(1) and (3)(b)(iii) of Banking companies Act 1949,

FACTS AND SUBMISSION

ARGUMENTS OF RESPONDENT (RBI)

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