MR. PRAMOD MALHOTRA AND ORS. versus UNION OF INDIA AND ORS.

Citation: [2004] 2 S.C.R. 688 · Decided: 26-02-2004 · Supreme Court of India · Bench: S.N. VARIAVA · Disposal: Dismissed

Judgment (excerpt)

A 
MR. PRAMOD MALHOTRA AND ORS. 
v. 
UNION OF INDIA AND ORS. 
FEBRUARY 26, 2004 
B 
[S.N. VARIAVA AND H.K. SEMA, JJ.] 
Banking Laws: . 
Banking Regulation Act, I987-Sections 22, 23, 45(2) and (7)-Sikkim 
C Banking Limited (SBL) applied for a licence, but RBI did not respond-Rather, 
RBI found several shortcomings and deficiencies in SBL functioning, yet 
authorised SBL to open a Branch in Delhi-Depositors depositing amount in 
the Branch-Bank incurred net loss of Rs. 56.22 crores-Special audit revealing 
siphoning of funds-Amalgamation of the bank with another bank and under 
D the scheme depositors to be paid interest lesser than the contractual rate-
Depositors seeking re-payment of their amount at the contractual rate of 
interest by RBI-Writ Petition filed in Supreme Court-Held: RBI while 
performing statutory functions has to balance general public interest with the 
interest and need of banks and financial institutions as such at the stage of 
issuing license for opening a branch-Decision of RBI to grant license to 
E open a branch was not correct when license under section 22 was not granted-
But it would not be sufficient to foist liability on RBI to repay all depositors-
Also RBI did not have day to day management and control on the bank and 
its relation with depositors of the bank was not such to hold it liable-Further 
compensation for violation of statutory duties is not applicable to loss caused 
F in financial transactions undertaken by individuals with open eyes. 
Sikkim Banking Limited is registered as a company in Sikkim and is 
carrying on banking activities. Banking Regulation Act, 1987 became 
applicable to Sikkim. SBL applied for a license. RBI did not respond. SBL 
continued to carry on banking business by virtue of the proviso of sub-clause 
G (2) of section 22. In 1996, RBI pointed out operational deficiencies in the 
working of SBL and called upon to cure the same. It also advised to raise 
additional capital to Rs. 50 crores and then only licemie could be issued. In 
1997, RBI conducted financial inspection of SBL and found several 
shortcomings and deficiencies in its functioning yet authorized SBL to open 
a branch in Delhi. SBL issued advertisement offering 14% rate of interest 
H 
688 
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PRAMOD MALHOTRA v. U.0.1. 
689 
and the petitioners deposited amount in this branch. In 1998, RBI found that A 
SBL had incurred a net loss of Rs. 56.22 crores. Special audit was carried 
out which revealed that the funds had been siphoned out to the tune of Rs. 
57.50 crores. Government of India then passed an Order of Moratorium and 
thereafter notified a Scheme of Amalgamation under Section 45(7) of the Act 
by whiCh SBL was amalgamated with the Union Bank of India. Under the 
scheme all the depositors were to be paid on pro-rata basis and were required B 
to surrender their fixed deposit receipts in return. Petitioners filed a writ 
petition before the High Court challenging the scheme. Pursuant to the 
direction of this Court directing that all matters connected with the 
amalgamation of SBL with UBI to be decided only in this Court, the writ 
petition before the High Court was withdrawn. Hence the present writ petition. C 
Appellants relying on Anns v. Merton London Borough's* case and also 
the other Indian cases wherein it was held that on failure to perform statutory 
duties local authorities are liable for the loss resulted, contended that the 
various provisions of the Banking Regulation Act cast a duty upon RBI to 
properly monitor banking companies and to safeguard the interest of the D 
depositors; that even though for 9 long years RBI had not issued a license to 
SBL because it found several deficiencies and irregularities in its functioning, 
it still allowed SBL to open a branch by granting a license; and that relying 
on the license issued by RBI, all persons who deposited amount with the Delhi 
branch of SBL on presumption that such a license had been issued only E 
because SBL's functioning is sound and its management good, RBI must pay 
all the depositors in full. 
Respondent-Union of India contended that the Indian cases relied upon 
by the appellant are all cases which relate to infringement of life and liberty 
under Article 21 i.e. where a person has been injured or killed and in those p 
type of cases the principle that on failure to perform statutory duties local 
authorities are liable for the loss resulted has been applied in India; that the 
appellant was not able to show a

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