Holding

Exclusion of employees under a banking amalgamation scheme must comply with natural‑justice requirements, including specific naming in the draft scheme and a pre‑exclusion hearing; the scheme‑making process is administrative, not legislative, and Section 45(7A) does not preclude judicial review.

Summary

Three private banks were amalgamated with larger banks under schemes drawn pursuant to Section 45 of the Banking Regulation Act, 1949. A total of 125 employees were excluded from service and their contracts terminated without being named in the draft schemes or given a hearing. The excluded employees challenged the exclusions, arguing that the draft schemes must list the names of those to be excluded and that natural justice required notice and an opportunity to be heard. The Supreme Court held that the scheme‑making process is administrative, not legislative, and that Section 45 does not bar the application of natural‑justice principles; the names of employees to be excluded must be specified in the draft scheme and they must be afforded a hearing before exclusion. The Court also rejected the contention that the six‑month moratorium justified bypassing procedural fairness and held that Section 45(7A) does not preclude judicial review. Consequently, the Court set aside the High Court judgments and ordered the transferee banks to take over the excluded employees on the same terms as before, granting them continuity of service.

Issues considered

The draft scheme under Section 45 must specifically name employees to be excluded.
Whether the exclusion of employees without a hearing violates the rules of natural justice.
Whether the scheme‑making process under Section 45 is legislative and thus exempt from natural‑justice requirements.
Whether Section 45(7A) (conclusive evidence) bars judicial review of procedural compliance.
Whether the six‑month moratorium period justifies dispensing with the hearing of excluded employees.

Legislation cited

Banking Regulation Act, 1949s. 45, s. 45(11), s. 45(5), s. 45(6), s. 45(7A)
Industrial Disputes Act, 1947

Subjects

natural justiceadministrative lawbanking regulationamalgamationemployee rightsSection 45due processArticle 14Article 21conclusive evidenceprocedural fairness

Judgment

K.I. SHEPHARD & ORS. ETC. ETC.
A
v.
UNION OF INDIA & ORS.

SEPTEMBER 18, 1987

B [RANGANATH MISRA AND MURARI MOHAN DUTT, JJ.)

Banking Regulation Act, 1949:

Section 45-Amalgamation of banks-Employees excluded from
employment by transferee banks-Draft scheme excluding names of
employees-Doctrine of natural justice-Whether applicable-Post-
C decisional hearing--Whether sufficient-Examination of dispute -~
regarding requirement of Procedure-Whether precluded-Scheme-

I
making process-Whether legislative.

Administrative Law:
D
Amalgamation of banks-Exclusion of employees from employ-
ment by transferee banks in accordance with amalgamation scheme-
Doctrine of natural justice-Applicability of.

Th"'Hindustan Commercial Bank, the Bank of Cochin Ltd. and
E Lakshmi Commercial Bank were amalgamated with Punjab National
Bank, Canara Bank, State Bank of India respectively in terms of sepa-
rate schemes drawn under the Banking Regulation Act, 1949, and
pursuant thereto 125 employees of these banks were excluded from
employment, and their services were not taken over by the respective
transferee banks. Some of these excluded employees filed writ petitions
F before the High Court which granted partial refief, but on appeal by the
transferee Bank the Writ Petitions were dismissed by the Division
Bench.

Against this, appeals by Special Leave were filed before this
Court. Some of the excluded employees filed writ petitions before this
G Court directly.

It was contended on behalf of the excluded employees that the
draft schemes did not include any name of employees intended to be .,,i,
excluded; that no opportunity of being heard as afforded to them before
exclusion was ordered, and the authorities concerned had not acted
H fairly; that none of them was responsible for ficticious, improper or

188
K.J. SHEPHARD v. U.O.J. 189

non-business like advances of loan to parties thereby bringing condi-
A
-f- lions nearabout bankruptcy for the appropriate banking companies,
that many other employees against whom there were dermite charges
already pending enquiry or even orders of dismissal bad been proposed
bad been taken over and retained in service of the transferee banks
while these excluded employees, without justification, had been called
upon to face this unfortunate situation. B

The transferee banks, the Reserve Bank of India and the Union of
y India filed affidavits in opposition. It was contended on behalf of the
Union of India that the scheme in respect of each of the amalgamated
• banks bad been approved by it as required under the Act and since
finality was attached to such schemes, the schemes could not be cbal-
c
1 lenged, particularly in view of the provisions contained in Article 31-A
of the Constitution. It was contended on behalf of the Reserve Bank of
v India that law did not require that the draft scheme should contain the
names of the employees to be excluded, that the incorporation of the
names finalised on the basis of scrutiny of the records before the
schemes were. placed before the RBI was sufficient compliance of the D
requirements of the law; that the provisions of the Act did not confer
any right on the employees of being beard; that the scheme-making
process was legislative in character and, therefore, did not come within
the ambit of natural justice, and the action, not being judicial or quasi-
judicial and, at the most, being administrative or executive was also not
-1 open to challenge on allegations of violation of rules of natural justice; E
that moratorium under the statutory provisions could not be beyond six
months and in view of the fact that the entire operation· bad to be
finalised within a brief time frame, the requirement of an enquiry by

•
notice to all the officers to be excluded could not have been intended to
be implanted into the provisions of section 45 and that provision of
compensation had been made for those who were excluded from the F
respective schemes.
\ Allowing the writ petitions and appeals, this Court,

HELD: 1. Rules of natural justice apply to administrative action
and the decision to exclude a section of the employees without comply- G
ing with requirements of natural justice was bad. [206H)

·-4..._ 2.1 Fair play is part of public policy and a guarantee for justice to.
citizens. In our system of Rule of Law, every social agency conferred
with power is required to act fairly so that social action would be just,
and there would be furtherance of the well-being of citizens. [207E) H
190 SUPREME COURT REPORTS [ 1988) 1 S.C.R.

A 2.2 The rules of natural justice have d~veloped with the growth of
civilization and the content thereof is often considered as a proper
measure of the level of civilization and Rule of Law prevailing in the
community. [207E-F)

2.3 Natural justice generally requires that persons liable to be
B directly affected by proposed administrative acts, decisions or proceed-
ings be given adequate notice of what is proposed so that they may be In
a position (a) to make representation on their own behalf; (b) or to
appear at a -hearing or enquiry (if one is held); and (c) effectively to
prepare their own case and to answer the case (if any) they had to meet.
Even when a State agency acts administratively, rules of natural justice
would apply. [206C-D)
c
3.1 Section 45 of the Banking Regulations Act provides a legisla-
tive scheme and the different steps required to be taken have been put
one after the other. On a simple construction of sub-sections (5) and (6)
and on the basis of the sequence pattern adopted in section 45, it is clear
D that the Act contemplates the employees to be excluded to be specifically
named in the draft scheme. Since It is a draft scheme prepared by RBI
and right to object or to make suggestions is extended to both the
banking company as also the transferee bank, and In view of the fact
that clause (I) of sub-section (5) specifies this item to be a matter which
may be included in the scheme, it must follow that the legislative lnten-
E lion is that the scheme would incorporate the names of such employees
as are intended to be excluded in accordance with the scheme. Once it is
incorP@rated in the scheme, the banking company as also the transferee
bank would be entitled to suggest/object to the Inclusion of names of
employees. [199E-F; H; 200A-B]

F 3.2 In case some employees of the banking company are intended
to be excluded, their names have to be specifically mentioned in the
scheme at the draft stage. The requirement of specific mention is signi-
ficant and the legislature must be taken to have intended compliance of
the requirement at that stage. The excluded employees in the instant
case, were in employment under the contract in the banking companies
G which were private banks. They have been excluded from service under
the transferee banks and the contracts had been terminated as a result
of inclusion of their names in the schemes. This exclusion has adversely
affected this category of employees and has brought about prejudice
~nd adverse civil consequences to them. [200D-E)

H 4.1 Natural justice cannot be employed In the exercise of legisla-
K.I. SHEPHARD v. U.0.1. 191

tive power. Power bas been conferred on the RBI in certain situations to A
--r- take steps for applying to the Central Government for an order of
moratorium ~ during the period o_f moratorium to pnipose either
reconstruction or amalgamation of the banking company. A scheme for
the purposes contemplated bas to be framed by RBI and placed before
the Central Giivemment for sanction. Power bas been vested in -the
Central Giivemment in terms of what is ordinarily known as a Henery- B
8 clause for making orders for removal of difficulties. [201H; 202A·Bl
y 4.2 Section 45(11) requires that copies of the scheme as also sncb

-- orders made by the Central Government are to be placed before both
Houses of Parliament. This requirement does not make the exercise in
regard to schemes a legislati.ve. process. Framing of the scheme unc1er
section 45 does not involve a legislative proces.~, and as such, rules of
c
r
/!'/
natural justice are applicable to the instant case. (202C I

4.3 The fact that orders made by the Central Government for
removillll difficulties as contemplated under sub-clause (10) were
also to be placed before the two Houses of Parliament makes it D
abundantly clear that the placing of the scheme before the two Houses
is not a relevant test for making the scheme framing process Iegis-
lative. (203B]

5.1 RBI which monitored the three amalgamations was required
~ to act fairly in the facts of the case. The situation necessitated a E
participatory enquiry in regard to the excluded employees. If an
opportnnlty to know the allegations and to have their say bad been
afforded, they could have no grievance on this score. The action dep-
rives them of their livelihood and brings adverse civil consequences and
could obvionsly not be taken on the ipse dixit of RBI officers without
verification of facts. In view of the time frame, a detailed enquiry may F
I
not be possible but keeping the legislative scheme in view, perhaps, a
\ simpler enquiry could be afforded. [206E-F]

5.2 In the facts of the case, there is no justification to bold that
rules of natural justice have been ousted by necessary Implication on
account of the time frame. On the other band, the time limited by G
statute provides scope for an opportunity to be extended to the intended
excluded employees before the scheme is tinailsed so that a bearing
commensurate to the situation is afforded before a section of the emp-
-/...
.~
loyees is thrown out of employment. [207F·Gl

5.3 There is no justitlcation to think of a post-decisional bearing. H
192 SUPREME COURT REPORTS [ 1988) 1 S.C.R.

A On the other hand, the normal rule should apply. The excluded emp-
loyees have already been thrown out of employment and having been
deprived of livelihood they must be facing serious difficulties. There is
no justification to throw them out of employment and then given them
an opportunity of representation when the requirement .is that they
should have the opportunity as a condition precedent to action. It is
B common experience that once a decision has been taken, there is a
tendency to uphold it and a representation may not really yield any
fruitful purpose. [208A-C)

6. Protection of the umbrella of conclusive evidence is not
attached to a situation as in the instant case, so as to bar the question
C regarding the requirements of the procedure laid down under the Act
and the opportunity afforded to the excluded employees from being
examined. There is, therefore, nothing in sub-section (7 A) of section 45
to preclude examination of the question. [208G I

[Each of the three transferee banks should take over the excluded
D employees on the same terms and conditions of emploY,Jllent under the
respective banking companies prior to amalgamation. The employees
would be entitled to the benefit of continuity of service for all purposes
including salary and perks throughout the period. It is open to the
transferee banks to take such action as they consider proper against
these employees in accordance with law. There is no justification to
E penalise some of the excluded employees who have not come to the
;..•..
Court. They too shall be entitled to the same benefits as the peti-
tioners.] [208H; 209A-B)

Union of India & Anr. v. Cynamide India Ltd. & Anr., [1987] 2
SCC 720; Perre Brothers v. Citrus Organisation Committee, [1975) 10
F SASR 555; Re (H) K (an infant), [1967] l AER 226; State of Orissa v.
Dr. (Miss) Binapani Dei & Ors., [1967) 2 SCR 625; A.k. Kraipak & ).
Ors., v. Union of India & Ors., [1970) 1 SCR 457; Chandra Bhavan
Boarding and Lodging, Bangalore v. The State of Mysore & Anr.,
[1970] 2 SCR 600; Swadeshi Cotton Mills v. Union of India, [1981) 2
SCR 533 and Smt. Somavanti & Ors. v. State of Punjab & Ors., [1963)
G 2 SCR 774, referred to.
ORIGINAL JURISDICTION: Writ Petition No. 177 of 1987
etc. etc.
(Under Article 32 of the Constitution of India).

H Dr. L.M. Singhvi, K.K. Venugopal, M.K. Ramamurthi, V.M.
K.I. SHEPHARD v. U.0.1. [MISRA, .I.] 193

Tarkunde, R.K. Garg, Ravi P. Wadhwani, Vrinda Grover, Vandana A
Chak, Ranjeet Kumar, M.N. Krishnamani, V. Shekhar, B.S. Maan,
M.A. Chinnaswami, V.J. Francis, Mathai M. Paikeday, N.M. Popli,
M.A. Krishnamurthi, Mrs. Chandan Ramamurthi, Balbir Singh,
Rajan Karanjawala, Mrs. Manik Karanjawala, Ravi P. Wadhwani,
P .N. Mishra, Ashok Grover, Ezaz Manbool, and K.K. Mohan for the
Petitioners. B

y G. Ramaswamy, Additional Solicitor General, Dr. Y.S. Chitale,
M.M. Abdul Khader, Soli J. Sorbjee, K.N. Bhat, G.L. Sanghi, O.C.
Mathur, Miss Srieen Sethna, Harish Salve, H.S. Parihar, Vipin
Chandra, Vijay Kr. Verma, Miss Madhu Moolchandani, Gopal Sub-
ramium, l:falida Khatoon, Mrs. Sushma Suri and P. Parmeshwaran for
the Respondents.
c
E.C. Aggarwala and D.D. Gupta for the Intervener.

The Judgment of the Court was delivered by
D
RANGANATH MISRA, J. The writ petitions under Article 32 of
the Constitution and appeals by special leave are against the judgment
of the Division Bench of the Kerala High Court in writ appeals have a
common set of facts as also law for consideration. These matters have
been heard together and are disposed of by this common judgment.
E
Hindustan Commercial Bank ('Hindustan' for short). The Bank
of Cochin Ltd. (hereafter referred to as 'Cochin Bank') and Lakshmi
Commercial Bank ('Lakshmi' for short) were private banks. Action
was initiated under section 45 of the Banking Regulation Act, 1949
('Act' for short) for amalgamation of these three banks with Punjab
National Bank, Canara Bank and State Bank of India respectively in F
-\ terms of separate schemes drawn under that provision of the Act.
Amalgamation has been made. Pursuant to the schemes, 28 employees
of Hindustan, 21 employees of Cochin Bank and 76 employees of
Lakshmi were excluded f.rom employment and their services were not
taken over by the respective transferee banks. Some of these excluded
employees of the Cochin Bank went before the Kerala High Court for G
relief under Article 226 of the Constitution. A learned Single Judge
gave them partial relief but on an appeal to the Division Bench by the
transferee bank concerned the writ petitions have been dismissed. The
civil appeals are against the decision of the Division Bench. The writ
petitions directly filed before this Court are by some of the excluded
employees of Hindustan and Lakshmi respectively. H
194 SUPREME COURT REPORTS [1988] l S.C.R.

A Though employees oflhe other two banks had not challenged the
vires of section 45 of the Act, on behalf of Lakshmi such a challenge
has been made. Since the grounds of attack on this score did not
impress us at all, we do not propose to refer to that aspect of the
submissions involving interpretation of Article 31-A, Article 16 and
Article 21. It has often been said by this Court that Courts should not
B enter into constitutional issues and attempt interpretation of its provi-
sions unless it ls really necessary for disposal of the dispute. In our
opinion, this group of cases can be disposed of without reference to
question of vires of some part of section 45 of the Act being examined.
Counsel on behalf of the excluded employees have broadly contended
that the draft schemes did not include any name of employees intended
c to be excluded; no opportunity of being heard was afforded to them
before exclusion was ordered under the schemes and the authorities
concerned have not acted fairly; they deny the allegation that any of
them was responsible for ficticious, improper or non-business like
advances of loan to parties thereby bringing conditions near about
bankruptcy for the appropriate banking companies; many other emp-
D loyees against whom there were definite charges already pending en-
quiry or even orders of dismissal had been proposed have been taken
over and retained in service of the transferee banks while these
excluded employees without justification have been called upon to
face this unfortunate situation.
E The transferee banks, the Reserve Bank of India (hereafter re-
ferred to as RBI for short) and the Union of India have appeared and
filed affidavits in opposition. The Union of India has contended that
the scheme in respect of each of the banks that has got amalgamated
had been approved by it as required under the Act and since finality
was attached to such schemes challenge was not open against the
F schemes particularly in view of the provisions contained in Article \
31-A of the Constitution. On behalf of the Reserve Bank of India. f
several contentions were raised by way of opposition and shortly
stated these submissions are:-

(1) Law does not require that the dr~ft scheme should
G contain the names of the employees to be excluded;

(2) The incorporation of the names finalised on the basis
of scrutiny of the records before the schemes were placed before
the RBI was sufficient compliance of the requirements of the
law;
H
K.f. SHEPHARD v, U.0.l. [MISRA, J.] 195

(3) the provisions of the Act did not confer any right on A
l the employees of being heard;

(4) the scheme-making process was legislative in character
and therefore did not come within the ambit of natural justice.
Alternately the action not being judicial or quasi-judicial and, at
the most being administrative or executive was also not open to B
challenge on allegations of violation of rules of natural justice;

(5) moratorium under the statutory provisions could not
be beyond six months and in view of the fact that the entire
operation had to be finalised within a brief time frame, the re·
quirement of an enquiry by notice to all the officers intended to C
be excluded could not have been intended to be implanted into
the provisions of section 45; and

(6) Provision of compensation has been made for those
who were excluded from the respective scheme.
D
Each of the transferee banks generally adopted the stand taken by
RBI.

Before we proceed to examine the tenability of the several con·
tentions and counter contentions advanced at the hearing, it is
_.. appropriate that we refer to the relevant provisions of the Act. The E
entire law applicable to the facts of these cases is to be found in Part Ill
of the Act and in particular in section 45. As far as relevant, that
section provides:

"Notwithstanding anything contained in the forego·
ing provisions of this Part or in any other law or any agree· F
ment or other instrument, for the time being in force,
where it appears to the Reserve Bank that there is good
reason so to do, the Reserve Bank may apply to the Central
Government for an order of moratorium in respect of a
banking company.
G
(2) The Central Government, after considering the
application made by the Reserve Bank under sub-section
( 1), may make an order of moratorium staying the comm-
enc~ment or continuance of all actions and proceedings
agamst the company for a fixed period of time on such
terms and conditions as it thinks fit and proper and may H
196 SUPREME COURT REPORTS [1988] l S.C.R.

A from time to time extend the period so however that the
total period of moratorium shall not exceed six months;

(3)

(4) During the period of moratorium, if the Reserve Bank
B is satisfied that-

(a) in the public interest; or

{b) in the interests of the depositors; or

(c) in order to secure the proper management of the
c banking company; or

{d) in the interests of the banking system of the
country as a whole,-it is necessary so to do, the Reserve
Bank may prepare a scheme-
D
(i) for the reconstruction of the banking company, or

(ii) for the amalgamation of the banking company
with any other banking institution (in this section referred
to as ''the transferee bank").
E
(5) The scheme aforesaid may contain provisions for
all or any of the following matters, namely:-

(a)

F (b)
\
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
f

(d)

G (e)

00 ................................................ .
(g)

H (h)
K.I. SHEPHARD v. U.0.1. [MISRA, l.J 197

(i) the continuance of the services of all the employees of A
the banking company (excepting such of them as not being
workmen within the meaning of the Industrial Disputes
Act, 1947 are specifically mentioned in the scheme) in the
banking company itself on its recbnstruction or, as the case
may be, in the transferee bank at the same remuneration
and on the same terms and conditions of service, which B
they were getting or, as the case may be, by which they
were being governed, ilnmediately before the date of the
order of moratorium:

Provided ........................................... .

(j) notwithstanding anything contained in clause (i) where
c
any of the employees of the banking company not being
workmen within the meaning of the Industrial Disputes
Act, 1947 are specifically mentioned in the scheme under
clause (i), or where any employees of the banking company
have by notice in writing given to the banking company or, D
as the case may be, the transferee bank at any time before
the expiry of one month next following the date on which
the sch~~t\ is sanctioned by the Central Government,
intimated their intention of not becoming employees of the
banking company on its reconstruction or, as the case may
be, of the transferee bank, the payment to such employees E
of compensation, if any, to which they are entitled under
the Industrial Disputes Act, 1947, and such pension,
t gratuity, provident fund and other retirement benefits ordi-
narily admissible to them under the rules or authorisations
of the banking company immediately before the date of the
/ order of moratorium; F
...
(k)

0) ............................................... .
(6) (a) A copy of the scheme prepared by the Reserve G
Bank shall be sent in draft to the banking company and also
to the transferee bank and any other banking company
concerned in the amalgamation, for suggestions and objec-
tions, if any, within such period as the Reserve Bank may
specify for this purpose;
H
(b) the Reserve Bank may make such modifications,
198 SUPREME COURT REPORTS [1988) 1 S.C.R.

if any, in the draft scheme as it may consider necessary in
A
the light of the suggestions and objections received from
the banking company anp also from the transferee bank,
and any other banking company concerned in the amalga-
mation and from any members, depositors or other cre-
ditors of each of those companies and the transferee bank.
B
(7) The scheme shall thereafter be placed before the Cent-
ral Government for its sanction and the Centra!' Govern- y
menf may sanction the scheme without any modifications
or with such modifications as it may consider necessary;
and the scheme as sanctioned by the Central Government
c
may specify in tbs behalf:

Provided ............................................

(7 A) The sanction accorded by the Central Government
4~

under sub-section (7), whether before or after the comm-
D encement of section 21 of the Banking Laws (Miscellane-
ous Provisions) Act, 1963, shall be conclusive evidence that
all the requirements of this section relating to reconstruc-
tion, or, as the case may be, amalgamation have been com-
plied with and a copy of the sanctioned scheme certified in
writing by an officer of the Central Government to be a
true copy thereof, shall, in all legal proceedings (whether in )..._
E
appeal or otherwise and whether instituted before or after
the commencement of the said section 21), be admitted as
evidence to the same extent as the original scheme. I
(8) On and from the date of the coming into operation of
F the scheme or any provision thereof, the scheme or such
provision shall be binding on the banking company or, as
the case may be, on the transferee bank and any other J
banking company concerned in the amalgamation and also
on all the members, depositors and other creditors and
employees of each of those companies and of the transferee
G bank, and on any other person having any right or liability
in relation to any of those companies or the transferee bank
.............
(9) ................................................ +
H (10) If any difficulty arises in giving effect to the provisions
K.I. SHEPHARD v. U.0.1. [MISRA, J.) 199

of the scheme, the Central Government may by order do A
+ anything not inconsistent with such provisions which
appear to it necessary or expedient for the purpose of
removing the difficulty.

( 11) Copies of the scheme or of any order made under
sub-section ( 10) shall be laid before both Houses of Parlia- B
ment, as soon as may be, after the scheme has been sanc-
tioned by the Central Government or, as the case may be,
the order has been made.

(12)

(13)
c
(14)

(15)
D

Allegations advanced on behalf of the excluded employees is that the
draft scheme contemplated under s1tb-section 6(a) did not specifically
mention names of the excluded employees and at a later stage when
the scheme was sent up by the RBI to the Central Government a
schedule containing the names of the excluded employees was E
attached to each of the schemes. Section 45 of the Act provides a
legislative scheme and the different steps required to be taken under
this section have been put one after the other. A reading of this section
indicates a sequence oriented pattern. What would ordinarily be in-
corporated in the draft scheme is indicated in sub-section (5). After
the requirements of sub-section (5) are complied with and the scheme F
comes to a presentable shape, sub-section (6)(a) requires a copy
thereof as prepared by RBI to be sent to the banking company (trans-
ferer) as also to the transferer bank. Clause (b) of sub-section (6)
authorises RBI to m'ake modifications in the draft scheme as it may
consider necessary in the light of suggestions and objections received
from the banking company and the transferee bank. On a simple con- G
struction of sub-sections (5) and (6) and on the basis of the sequence
pattern adopted in section 45 it would be legitimate to hold that the Act
contemplates the employees to be excluded to be specifically named in
the draft scheme. Since it is a draft scheme prepared by RBI and the
right to object or to make suggestions is extended to both the banking
company as also the transferee bank, and in view of the fact that clause H
200 SUPREME COURT REPORTS [1988] 1 S.C.R.

A (i) of sub-section (5) specifies this item to be a matter which may be
included in the scheme, it must follow that the legislative intention is
that the scheme would incorporate the names of such employees as are
intended to be excluded in accordance with the scheme. Once it is
incorporated in the scheme the banking company as also the transferee
bank would be entitled to suggest/object to the inclusion of names of
B employees. It may be that the names of some of the employees may
have been wrongly included and the banking company-the hither-to
employer would be in a position to suggest/object to the inclusion of
the names or it may even be that names of some undesirable emp-
loyees which should have been left out have been omitted and the
banking company as the extant employer of such employees would be
most competent to deal with such a situation to bring about rectifica-
c tions by exercising the power to suggest/object to the draft scheme.
The contention advanced on behalf of RBI that since it is open to it
under sub-section (6)(b) of section 45 to make modifications of the
draft scbeme, even if the names were not included earlier, at the stage
of finalising the scheme for placing it before the Central Government
D as required under sub-section (7), the earlier non-inclusion is not a
contravention is not acceptable. We are of the view that in case some
employees of the banking company are intended to be excluded, their
names have to be specifically mentioned in the scheme at the draft
stage. The requirement of specific mention is significant and the legis-
lature must be taken to have intended compliance of the requirement
E at that stage. Mr. Salve for the RBI adopted the stand that the provi-
sions of section 45 did not specifically concede a right of objection or
making of suggestions to employees and in sub-section (6}(b) mention
was made only' of members, depositors or other creditors. For the
reasons we have indicated above, this aspect of the contention does
not impress us.
F
It is the common case of RBI as also the transferee banks that the
records of service of each of the employees had been scrutinised and
the names for inclusion in the scheme were picked up on the basis of
materials like irresponsible action in regard to sanction of loans and
accommodations to customers which affected the financial stability of
G the banking company concerned. Such an allegation made in the
counter-affidavit in this Court has been seriously disputed by the
litigating excluded employees. It is their positive case that there was no
foundation in such allegation and dubious loans, if any, had been
sanctioned under instructions of the superior in the banking company
and, therefore, did not involve any delinquency on the part of such
H employees. Since it is the case of the respondents that exclusion had
K.I. SHEPHARD v. U,.0.1. [MISRA, J.) 201

been ordered on the basis of an obj.ective assessment and the very A
foundation of the allegation upon which such assessment has been
made is disputed, a situation arose where facts had to be ascertained,
and it involved assessment. That has admittedly not been done.

These employees were in employment under contract in the
banking companies which were private banks. They have been ex- B
eluded from service under the transferee banks and the contracts have
now been terminated as a result of inclusion of their names in the
schemes. It cannot be disputed-nay has not been-that exclusion has
adversely affected this category of employees and has brought about
prejudice and adverse civil consequences to them. Two contentions
have been raised with reference to this aspect of the matter:-
c
( 1) There has been infraction of natural justice and

v (2) The transferee banks which are 'State' and RBI which
has monitored the operation being admittedly 'State' their action
in excluding some of the employees of the banking company and D
taking over the services of others who are similarly situated is hit
by Article 14 of the Constitution. It may be pointed out that
according to the excluded employees, many facing similar allega-
tions and/or in worse situation have been taken over.

Whether there is infraction of Article 14 of the Constitution on E
the allegation advanced would depend upon facts relating to the ex-
cluded employees as also the allegedly derelict employees whose
services have been taken over. In the absence of an enquiry in which
the excluded employees should have been given an opportunity of
participation it has become difficult for us to probe into the matter
further. F

Admittedly the excluded employees have neither been put to
notice that their services were not being continued under the trans-
feree banks nor had they been given an opportunity of being heard
with reference to the allegations now levelled against them. Learned
counsel for RBI and the transferee banks have taken the stand that the G
scheme-making process under section 45 is legislative in character and,
therefore, outside the purview of the ambit of natural justice under the
1 protective umbrella whereof the need to put the excluded employees
to notice or enquiry arose. It is well-settled that natural justice will not
be employed in the exercise of legislative power and Mr. Salve has
rightly relied upon a recent decision of this Court being Union of India H
202 SUPREME COURT REPORTS (1988] 1 S.C.R.

A
& Anr. v. Cynamide India Ltd. & Anr., (1987] 2 SCC 720 in support of +
such a position. But is the scheme-making process legislative? Power
has been conferred on the RBI in certain situations to take steps for
applying to the Central Government for an order of moratorium and
during the period of moratorium to propose either reconstruction or
amalgamation of the banking company. A scheme for the purposes
B contemplated has to be framed by RBI and placed before the Central
Government for sanction. Power has been vested in the Central
Government in terms of what is ordinarily known as a Henery-8 clause 'r
for making orders for removal of difficulties. Section 45(11) requires
that copies of the schemes as also such orders made by the Central
Government are to be placed before both Houses of Parliament. We
do not think this requirement makes the exercise in regard to schemes
c a legislative process. It is not necessary to go to any other authority as
the very decision relied upon by Mr. Salve in the case of Cynamide
India Ltd. (supra) lays down the test. In paragraph 7 of the judgment it_
has been indicated:-

D "Any attempt to draw a distinct line between legislative
and administrative functions, it has been said, is 'difficult in
theory and impossible in practice'. Though difficult, it is
necessary that the line must sometimes be drawn as diffe-
rent legal rights and consequences may ensue. The distinc-
tion between the two has usually been expressed as 'one
between the general and the particular'. 'A legislative act is
....
the creation and promulgation of a general rule of conduct
without reference to particular cases; an administrative act
is the making and issue of a specific direction or the appli-
cation of a general rule to a particular case in accordance
with the requirements of policy'. 'Legislation is the process
F of formulating a general rule of conduct without reference
to particular cases and usually operating in future; adminis- ~·
!ration is the process of performing particular acts, of issu- · ·
ing particular orders or of making decisions which apply
gen1>ral rules· to particular cases'. It has also been said:
"Rule-making is normally directed towards the formula-
G tion of requirements having a general application to all
members of a broadly identifiable class" while, "an
adjudication, on the other hand, applies to specific indi-
viduals or situations. But this is only a broad distinction, .+
not necessarily always true."

H Applying these tests it is difficult to accept Mr. Salve's contention that
K.I. SHEPHARD v. U.0.1. (MISRA, J.] 203

the framing of the scheme under section 45 involves a legislative pro- A
cess. There are similar statutory provisions which require placing of
material before the two Houses of Parliament yet not involving any
legislative activity. The fact that orders made by the Central Govern-
ment for removing difficulties as contemplated under sub-clause (10)
are also to be placed before the two Houses of Parliament makes it
abundantly clear that the placing of the scheme before the two Houses B
is not a relevant test for making the scheme framing process legisla-
tive. We accordingly hold that there is no force in the contention of
Mr. Salve that the process being legislative, rules of natural justice
.were not applicable.
'
The alternate contention on this score is that the scheme-making
process being an executive activity or alternately an administrative
c
·.~
matter, rules of natural justice have no application. This contention
j
has again to be rejected. Netheim in "Privy Council, Natural Justice
and Certiorari" has indicated:-

"Formerly the presumption had been that there was D
no obligation to give a hearing unless the statute itself indi-
cated such an obligation; now the presumption is that there
is such an obligation unless the statute clearly excludes it,
notwithstanding the vesting of a power, in subjective
terms, in a minister responsible to Parliament."
E
As has beer. pointed out by Wells J. in Perre Brothers v. Citrus Organi-
sation Committee, [1975] 10 SASR 555:-

"It is now well established-and there is no need for
me to canvass the innumerable authorities bearing on this
point-that duties, responsibilities and functions of an F
administrative authority may be purely ministerial, or they
may embody some quasi or semi-judicial characteristic.

At one time a good deal of ingenuity-and with all
respect it seems to me a great deal of energy-was wasted
in attempting to discern whether a particular function was G
administrative or quasi-judicial. In my view the House of
Lords, and now the High Court, have, to a very large ex-
tent set all such controversies at rest.

In my opinion, the test now is not so much as to
whether one can fairly call something "ministerial" or H
204 SUPREME COURT REPORTS [1988] 1 S.C.R.

A "administrative'', or "quasi-judicial" but whether the
duties of a non-judicial authority must, having regard to
the wording of the Act, be carried out in a spirit of judicial
fairness."

In Re (H) K (an infant), [ 1967] 1 AER 226 Lord Parker, CJ,
B found that the immigration officer was not acting in a judicial or quasi-
judicial capacity. Yet, the learned Chief Justice held that he still had to
act fairly. In that case it meant giving K an opportunity of satisfying y
the officer as to his age, and for that purpose he had to let K know
what his immediate impression was so that K could disabuse him of it.
Lord Parker observed:-
c "I appreciate that in saying that, it may be said that
one is going further than is permitted on the decided cases
because heretofore at any rate the del:isions of the courts
do seem to have drawn a strict line in these matters accord-
ing to whether there is or is not a duty to act judicially or
D quasi-judicially".

The obligation to act fairly even in administrative decision making has
since been widely followed.

Mulla in 'Fairness: The New Natural Justice' has stated:-
E
"Natural justice co-exists with, or reflected, a wider
principle of fairness in decision-making and that all judicial
and administrative decision-making and that all judicial
and administrative decision-makers had a duty to act
fairly."
F
In the case of State of Orissa v. Dr. (Miss) Binapani Dei & Ors., (1967] }-
2 SCR 625 this Court observed:-

"It is true that the order is administrative in character
but even an administrative order which involves civil conse-
G quences as already stated, must be made consistently with
the rules of natural justice after informing the first respon-
dent of the case of the State, the evidence in support
thereof and after giving an opportunity to the first respon-
dent of being heard and meeting or explaining the
evidence. No such steps were admittedly taken; the High
H Court was, in our judgment, right in setting aside the order
of the State."
K.l. SHEPHARD v. U.0.1. [MISRA, J.) 205

In A.K. Kraipak & Ors. v. Union of India & Ors., [1970] 1SCR457 a
A
Constitution Bench quoted with approval the observations of Lord
Parker in Re: (H) K (an infant) (supra). Hegde, J. speaking for the
Court stated:-

"Very soon thereafter a third rule was envisaged and
that is that quasi-judicial enquiries must be held in good B
faith, without bias and not arbitrarily or unreasonablly. But
in the course of years many more subsidiary rules came to
be added to the rules of natural justice. Till very recently it

.. was the opinion of the courts that unless the authority con-
cerned was required by the law under which it functioned
to act judicially there was no room for the application of the
rules of natural justice. The validity of that limitation is c
now questioned. If the purpose of the rules of natural
J
justice is to prevent miscarriage of justice one fails to see
\ why those rules should be made inapplicable to administra-
tive enquiries. Often times it is not easy to draw the line
that demarcates administrative enquiries from quasi- D
judicial enquiries. Enquiries which were considered
administrative at one time are now being considered as
quasi-judicial in character. Arriving at a just decision is the
aim of both quasi-judicial enquiries as well as administra-
tive enquiries. An unjust decision in an administrative en-
quiry may have more far reaching effect than a decision in a E
quasi-judicial enquiry."

These observations in A.K. Kopak's (supra) case were followed by
another Constitution Bench of this Court in Chandra Bhavan Board-
ing and Lodging, Baf1Kalore v. The State of Mysore & Anr., [1970] 2
SCR 600. In Swadeshi Cotton Mills v. Union of India, [1981] 2 SCR F
533 a three-Judge Bench of this Court examined this aspect of natural
justice. Sarkaria, J. who spoke for the Court, stated:-
1

"During the last two decades, the concept of natural justice
has made great strides in the realm of administrative law.
Before the epoch-making decision of the House of Lords in G
Ridge v. Baldwin, it was generally thought that the rules of
natural justice apply only to judicial or quasi-judicial pro-
ceedings; and for the purpose, whenever a breach of the
1
rule of natural justice was alleged, Courts in England used
to ascertain whether the impugned action was taken by the
statutory authority or tribunal m the exercise of its H
206 SUPREME COURT REPORTS [ 1988] I S.C.R.

A administrative or quasi-judicial power. In India also, this
was the position before the decision of this Court in Dr.
Bina Pani Dei's case (supra); wherein it was held that even
an administrative order or decision in matters involving
civil consequences, has to be made consistently with the
rules of natural justice. This supposed distinction between
B quasi-judicial and administrative decisions, which was
perceptibly mitigated in Bina Pani Dei's case (supra) was
further rubbed out to a vanishing point in A.K. Kraipak's
case (supra) ......................... ".

On the basis of these authorities it must be held that even when a State
c agency acts administratively, rules of natural justice would apply. As
stated, natural justice generally requires that persons liable to be
directly affected by proposed administrative acts, decisions or pro·
ceedings be given adequate notice of what is proposed so that they may
be in a position (a) to make representations on their own behalf; (b) or
to appear at a hearing or enquiry (if one is held); and (c) effectively to
D prepare their own case and to answer the case (if any) they have to
meet.

Natural justice has various facets and acting fairly is one of them.
RBI which monitored the three amalgamations was required to act
fairly in the facts of the case. The situation necessitated a participatory
E enquiry in regard to the excluded employees. Since the decision. to )--
exclude them from service under the transferee banks is grounded
upon a set of facts the correctness whereof they deny, if an opportunity j
to know the allegations and to have their say had been afforded, they 1
could have no grievance on this score. The action deprives them of
their livelihood and brings adverse civil consequences and could obvi·
F ously not be taken on the ipse dixit of RBI officers without verification
of facts. It is quite possible that a manoeuvring officer of the banking )---
company adversely disposed of towards a particular employee of such .
bank could make a report against such employee and have him exc-
luded from further service under the transferee bank. The possibility
of exclusion on the basis of some mistake such as to identity cannot
G also be ruled out. There is all the more apprehension of this type is the
process has to be completed quickly and very often the records of a
large number of employees have to be scrutinised. We are of the view
that rules of natural justice apply to administrative action and in the ~
instant cases the decision to exclude a section of the employees with-
out complying with requirements of natural justice was bad.
H
K.I. SHEPHARD v. U.0.1. [MISRA, J.] 207

It has been contended on behalf of respondents that moratorium
A
could be for a total period of six months and that was the time allowed
for the entire operation to be conducted. In view of the time frame, by
necessary implication it must follow that application of natural justice
compliance of which would involve a time-consuming process was
ruled out. We do not think that there is any merit in this contention
either. As a fact, in respect of the three banks the total number of B
excluded employees is around 125. It is the common case of parties
that proceedings were pending against some of them. It may be that in
view of the time frame a detailed enquiry involving communication of
allegations, show cause, opportunity to lead evidence in support of the
allegations and in defence of the stand of the employees may not be
possible, Keeping the legislative scheme in view perhaps a simpler
enquiry, for instance, communication of the allegation and even re-
c
ceiving an explanation and in cases where the allegation was serious or
there was a total denial though there was firm basis for the allegation a
single personal hearing could be afforded. In this case we are not really
concerned with the manner or extent of hearing as there has been no
hearing at all. It must, therefore, be held that>the action of excluding D
these employees in the manner done cannot be supported.

Fair play is a part of the public. policy and is a guarantee for
justice to citizens. In our system of Rule of Law every social agen']
conferred with power is required to act fairly so that social action
would be just and there would be furtherance of the well-being of E
citizens. The rules of natural justice have developed with the growth of
civilisation and the content thereof is often considered as a proper
measure of the level of civilisation and Rule of Law prevailing in the
community. Man within the social frame has struggled for centuries to
bring into the community the concept of fairness and it has taken
scores of years for the rules of natural justice to conceptually enter into F
the field of social activities. We do not think in the facts of the case
there is any justification to hold that rules of natural justice have been
ousted by necessary implication on account of the time frame. On the
other hand we are of the view that the time limited by statute provides
scope for an opportunity to be extended to the intended exduded
employees before1he scheme is finalised so that a hearing commensu- G
rate to the situation is affordei:l before a section of the employees is
thrown out of employment.

We may now point out that the learned Single Judge of the
Kerala High Court had proposed a post-amalgamation hearing to meet
the situation but that has been vacated by the Division Bench. For the H
208 SUPREME COURT REPORTS (1988] 1 S.C.R.

A reasons we have indicated, there is no justification to think of a post- +-
decisional hearing. On the other hand the normal rule should apply. It
was also contended on behalf of the respondents that the excluded
employees could now represent and their cases could be examined. We
do not think that would meet the ends of justice. They have already
been thrown out of employment and having been deprived of liveli-
B hood they must be facing serious difficulties. There is no justification
to throw them out of employment and then given them an opportunity
of representation when the requirement is that they should have the Y
opportunity referred to above as a condition precedent to action. It is
common experience that once a decision has been taken, there is a
tendency to uphold it and a representation may not really yield any
C fruitful purpose.

'Amalgamation' as such saved under Article 31A(l)(c) of the
Constitution is not under challenge here. Strong reliance, however,
had been placed on the provisions of sub-section (7A) of section 45 of
the Act. The relevant part of it is as requoted here for convenience:-
D
"The sanction accorded by the Central Government
under sub-section (7) . . . . . . . . . . shall be conclusive
evidence that all the requirements of this section relating to
. . . . . . . . . . . . amalgamation have been complied with
"
E
This provision is indeed one for purposes of evidence. In Smt.
Somavanti & Ors. v. State of Punjab & Ors., (1963] 2 SCR 774 this
Court pointed out that there was no real difference between 'conclu-
sive proof' provided for in section 4 of the Evidence Act and 'conclu-
sive evidence' as appearing in sub-section (7A). This provision does
F not bar the raising of a dispute of the nature received here. As we have
already pointed out, amalgamation is not under challenge. Parties are
disputing as to what exactly are the requirements of the procedure laid
down under the Act and the position that no opportunity was afforded
to the excluded employees is not in dispute. To a situation as here
protection of the umbrella of conclusive evidence is not attached so as
G to bar the question from being examined. There is, therefore, nothing
in sub-section (7A) to preclude examination of the question canvassed
here.

The writ petitions and the appeals must succeed. We set aside
the impugned judgments of the Single Judge and Division Bench of the
H Kerala High Court and direct that each of the three transferee banks
K.I. SHEPHARD v. U.0.1. (MISRA, J.] 209

should take over the excluded employees on the same terms and condi- A
tions of employment under the respective banking companies prior to
moratorium. The employees would be entitled to the benefit of con-
tinuity of service for all purposes including salary and perks through-
out the period. We leave it open to the transferee banks to take such
action as they consider proper against these employees in accordance B
with law. Some of the excluded employees have not come to Court.
There is no justification to penalise them for not having litigated. They
too shall be entitled to the same benefits as the petitioners. Ordinarily
·'{
the successful parties should have been entitled to costs but in view of
the fact that they are going back to employment, we do not propose to
make orders of costs against their employers. We hope and trust that
the transferee banks would look at the matter with an open mind and C
would keep themselves alive to the human problem involved in it.

N.P.V. Petitions & Appeals allowed.