Supreme Court Clarifies CEO Appointment in Cooperative Banks: Chhattisgarh State Co-Operative Bank vs. Zila Sahkari Kendriya Bank (2020)

Date of the Judgment: March 04, 2020

Citation: (2020) INSC 241

Judges: Dr. Dhananjaya Y Chandrachud, J and Ajay Rastogi, J

Can an apex cooperative bank directly appoint the CEO of a district central cooperative bank, or does that power rest solely with the district bank itself? The Supreme Court of India recently addressed this question, clarifying the powers and limitations of both apex and central cooperative banks in the appointment of their Chief Executive Officers (CEOs). This judgment interprets the Chhattisgarh Co-Operative Societies Act, 1960, specifically concerning the appointment of CEOs in cooperative banks. The bench comprised of Justice Dr. Dhananjaya Y Chandrachud and Justice Ajay Rastogi, with the majority opinion authored by Justice Dr. Dhananjaya Y Chandrachud.

Case Background

The case revolves around a dispute between the Chhattisgarh State Cooperative Bank (the appellant), the apex body of cooperative banks in Chhattisgarh, and the Zila Sahkari Kendriya Bank (the first respondent), a district central cooperative bank. The first respondent’s CEO was arrested on August 9, 2017, on charges of corruption and was subsequently suspended. Following this, the Chairperson of the first respondent appointed an interim CEO on August 10, 2017. However, on August 11, 2017, the appellant appointed the sixth respondent as the CEO of the first respondent, citing that the interim appointee did not meet the eligibility criteria set by the Reserve Bank of India (RBI). The first respondent challenged this appointment, asserting that the power to appoint a CEO lies solely within its discretion.

Timeline:

Course of Proceedings

The first respondent filed a Writ Petition before the High Court of Chhattisgarh, challenging the legality of the appellant’s order appointing the sixth respondent as CEO. A Single Judge of the High Court dismissed the petition, holding that the appointment was legally sustainable under Section 54(3) of the Chhattisgarh Co-Operative Societies Act, 1960 (1960 Act) and had been ratified by the Registrar of Cooperative Societies. However, a Division Bench of the High Court overturned this decision, stating that the amended Section 54(3) did not grant the appellant any role in the appointment of the CEO. The Division Bench held that the power to appoint a CEO rested with the Registrar only if the District Central Cooperative Bank failed to make an appointment within a specified timeframe.

Legal Framework

The Supreme Court examined the following key provisions of the 1960 Act:

• Section 49-E: This section deals with the appointment of Managing Directors and CEOs in certain circumstances.
  • Section 49-E(1): Pertains to Apex Societies, where the State Government has contributed to its share capital or provided financial assistance. It mandates a Managing Director selected by a State-level committee.
  • Section 49-E(2): Pertains to Central Societies, where the State Government has contributed to its share capital or provided financial assistance. It states that the CEO shall be appointed from the cadre maintained under Section 54, or with the prior approval of the Registrar.
• Section 54: This section deals with the appointment of managers, secretaries, and other officers.
  • Section 54(1): Specifies that no society shall appoint a manager or other paid officer unless they hold the prescribed qualifications.
  • Section 54(2): Mandates that Apex and Central Societies maintain cadres of officers as directed by the State Government.
  • Section 54(3): Empowers the State Government to specify which societies shall employ officers from the cadres maintained by Apex or Central Societies. It also includes clauses (a) and (b), inserted by the 2016 amendment:
    • Section 54(3)(a): States that the eligibility criteria for the CEO of any Cooperative Bank shall be as prescribed by the RBI.
    • Section 54(3)(b): States that if a Cooperative Bank fails to appoint a CEO within a specified period, the Registrar may appoint an eligible officer of the Bank.

The Court noted that Section 49-E applies when the State Government has a financial stake in the cooperative society. Section 54(3) was amended in 2016 to include specific provisions for Cooperative Banks, giving them the power to appoint their CEOs subject to RBI guidelines, and allowing the Registrar to appoint a CEO only if the bank fails to do so within a specified period. The court also considered a notification issued by the State of Madhya Pradesh on 12 January 1971, which stipulated that Central Cooperative Banks must appoint officers from the cadre constituted by the State Cooperative Bank.

Arguments

Appellant’s Submissions:

• The CEO of the first respondent should have the prescribed qualifications under Section 54(1) of the 1960 Act.
• As per Section 54(2), the appellant maintains a cadre of officers, and the first respondent is obligated to appoint a CEO from this cadre as per Section 54(3) and the notification dated 12 January 1971.
• The 2016 Amendment to Section 54(3) should be read with other provisions and not independently.
• The first respondent’s interim CEO did not meet the required criteria, justifying the appellant’s appointment of the sixth respondent.
• The Registrar’s ratification and the first respondent’s BoD’s acceptance of the sixth respondent’s appointment validate the appellant’s action.
• The appellant argued that the CEO of the Central Cooperative Bank should be an officer from the cadre maintained by the Apex Bank.
• Financial control can be maintained through the power to appoint CEOs.

Respondent’s Submissions:

• Section 57-B of the 1960 Act (inserted by the 2012 Amendment Act), which previously governed CEO appointments, was omitted by the 2016 Amendment Act.
• The power to appoint a CEO lies with the Cooperative Society itself, not the Apex Society, as per Section 54(3)(a) and (b).
• The CEO should be appointed from the eligible officers of the said Cooperative Bank.
• The notification dated 12 January 1971 is nullified by the 2012 and 2016 Amendment Acts.
• The language of Section 54(3)(b) is plain and unambiguous, stating that the Cooperative Society shall appoint the CEO.
• The action of the State Cooperative Bank in appointing the CEO of the Central Cooperative Bank is arbitrary and illegal.

The core of the dispute lies in the interpretation of the amended Section 54(3) and its impact on the powers of the Apex Society versus the Central Society in appointing a CEO. The appellant argued for a centralized appointment system to maintain financial control, while the respondent advocated for the autonomy of the Central Society in choosing its CEO.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the appellant, as the Apex Society, has the power to appoint the CEO of the first respondent, a Central Cooperative Bank.
2. How to reconcile the provisions of Section 49-E(2) and Section 54(3) of the 1960 Act, particularly after the 2016 amendment.
3. Whether the notification dated 12 January 1971 is still applicable in light of the amendments to the 1960 Act.
4. Whether the power to appoint a CEO lies solely with the Cooperative Bank itself or with the Apex Society.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that clauses (a) and (b) of Section 54(3) are special provisions for Cooperative Banks, granting them the power to appoint their CEOs. However, this power is not absolute for Central Societies that fall under Section 49-E(2). The Court emphasized the need fora harmonious interpretation of all provisions, ensuring that the general provisions do not override the special ones. The Court also upheld the applicability of the notification dated 12 January 1971, which requires Central Cooperative Banks to appoint officers from the cadre constituted by the State Cooperative Bank. Thus, the Court concluded that while the power to appoint a CEO lies with the Cooperative Bank, it is subject to the condition that the CEO is appointed from a panel of officers forwarded by the Apex Society, if the bank falls under Section 49-E(2) and a cadre has been constituted under Section 54. The Court set aside the judgment of the Division Bench of the High Court and upheld the appointment of the sixth respondent.

Decision

The Supreme Court allowed the appeal filed by the Chhattisgarh State Cooperative Bank, setting aside the judgment of the Division Bench of the High Court. The Court clarified that:

• Cooperative Banks have the power to appoint their CEOs, subject to the condition that the CEO is appointed from a panel of officers forwarded by the Apex Society if the bank falls under Section 49-E(2) and a cadre has been constituted under Section 54.
• The provisions of Section 49-E(2) and Section 54(3) must be harmoniously interpreted.
• The notification dated 12 January 1971 is still applicable and requires Central Cooperative Banks to appoint officers from the cadre constituted by the State Cooperative Bank.

The Court also emphasized the need to maintain regulatory control over Central Societies, which is achieved through the power to appoint CEOs from a cadre maintained by the Apex Society. This judgment provides a clear framework for the appointment of CEOs in cooperative banks, balancing the autonomy of the banks with the need for regulatory oversight.

Flowchart: CEO Appointment Process

Conclusion

The Supreme Court’s judgment in Chhattisgarh State Co-Operative Bank vs. Zila Sahkari Kendriya Bank (2020) provides crucial clarity on the appointment of CEOs in cooperative banks. The Court harmonized the provisions of the Chhattisgarh Co-Operative Societies Act, 1960, emphasizing that while Cooperative Banks have the power to appoint their CEOs, this power is subject to the condition that the CEO is appointed from a panel of officers forwarded by the Apex Society if the bank falls under Section 49-E(2) and a cadre has been constituted under Section 54. This decision ensures a balance between the autonomy of Cooperative Banks and the need for regulatory oversight, maintaining financial control through the power to appoint CEOs from a cadre maintained by the Apex Society. The judgment also confirms the continued applicability of the notification dated 12 January 1971, which requires Central Cooperative Banks to appoint officers from the cadre constituted by the State Cooperative Bank. This case serves as a significant precedent for future disputes regarding CEO appointments in cooperative banks, underscoring the importance of adhering to both the specific and general provisions of the law.