Calcutta High Court Restrains WB Govt From Conducting Special Audit Of Bank Headed By BJP MLA Suvendu Adhikari, Allows Inspection

The Calcutta High Court on Friday held that the West Bengal government's Co-operative Department shall not conduct a special audit of the Contai Cooperative Bank headed by BJP MLA and Leader of Opposition Suvendu Adhikari. 

However, Justice Shampa Sarkar permitted inspection of all books of account and other relevant documents to be conducted by the State authorities. 

"The petitioners shall cooperate with the inspection, produce all documents, books of accounts etc. and answer queries which are raised during such inspection. All defects and non-compliances should be removed and rectified by the petitioners in accordance with law, if called upon to do so", the order stated. 

Background:

In the instant case, the petitioner, a primary co-operative society registered under the West Bengal Co-operative Societies Act, 2006 ( 2006 Act) and engaged in the banking business had challenged the order dated June 12, 2021 of the Co-operative Department, West Bengal Government to conduct a special audit. Further vide order dated June 14, 2021, the Co-operation Department had decided to conduct an inspection under the provisions of Section 99(1)(a) of the 2006 Act.

The counsel on behalf of the petitioner argued that neither the Finance Department, Government of West Bengal nor the Additional Registrar of Cooperative Societies, (Urban Credit), West Bengal have any control over the internal management and finances of the petitioner. This is because under Section 35 of the Banking Regulation Act, only the Reserve Bank of India (RBI) has the power to conduct a special audit and inspection subsequent to a direction to this effect by the Central government.

The petitioner further contended that it had been purposefully singled out by the State authorities and that there have been numerous instances wherein the internal control and management of the bank have been unlawfully interfered with by the State authorities. Reliance was also placed on Section 134C (2) of the 2006 Act which directs that Co-operative Credit Structure Entities shall have autonomy in all financial matters and matters relating to internal administration. Further, it was submitted that audit reports had been filed by the petitioner with the RBI and no queries had been subsequently raised by the RBI. Thus, a special audit cannot be independently conducted by the State authorities without a reference to the RBI.

On the other hand, the counsel for the Co-operation Department relied on the Memorandum of Understanding (MOU) between the RBI and the State of West Bengal whereby both the State government and the RBI had reserved the right to exercise concurrent regulatory powers over all Urban Co-operative Banks (UCB). Further it was contended that since the petitioner is a co-operative society registered under the 2006 Act, the State government would not lose power conferred by the legislation in inspecting and taking appropriate measures to ensure its proper functioning.

Observations:

Pursuant to a perusal of the rival contentions, the Court noted that the Government of West Bengal, Cooperation Directorate has been appointing the statutory auditors in respect of the concerned bank since 2016. Hence the Court held that prima facie it appears that the Co-operation Department and Assistant Registrar of Co-operative societies have all along been connected with the concerned statutory audit.

Further, referring to the aforementioned MOU, the Court observed,

"The Memorandum of Understanding at Clause 2, categorically provides that the State Government would undertake to introduce a long form audit report for statutory audit and modify audit rating models in alignment with the gradation system adopted by the Reserve Bank of India for all UCBs and provide for statutory audit by Chartered Accountants (CAs) appointed in consultation with the Bank for UCBs with deposit over Rs.25 crores and special audit by CAs, if required by the Bank, for any UCB."

The Court further observed that vide letter dated June 3, 2021 the Secretary of the concerned cooperative bank had been informed by the Cooperation Directorate that certain compliances had not been carried out. Accordingly, the Court allowed the inspection to be conducted by the State authorities by observing,

"It appears that notices of non-compliance as transpired in the statutory audit report had been given to the petitioners and the petitioners had failed to comply with them, which is disputed by the petitioners, this court is inclined to allow the inspection. The inspection shall continue on the basis of the audit requisitions, as mentioned in the letters dated December 6, 2020 and June 3, 2021"

However with regards to the special audit, Justice Sarkar ordered that such a special audit shall not be conducted without taking the leave of the Court.

"Special audits are needed when it is suspected that the laws and regulations have been violated in the management of an organization. The reasons for the special audit have not been disclosed in the notice issued to the petitioners. The subjective satisfaction of the Finance Department to hold the special audit in respect of the said bank has to be brought on record", the order stated.

Accordingly, the petition was disposed of by directing the respondents including the RBI to file a counter affidavit within 4 weeks. Subsequently a reply in this regard has to be filed by the petitioner within two weeks thereafter. The Court clarified that the question of jurisdiction and power of the State Government would be decided during the final hearing.

Case Title: Contai Co-operative Bank Limited & Anr v. State of West Bengal & Ors.

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