(2012) 294 KLR 294

IN THE HIGH COURT OF KERALA AT ERNAKULAM

PRESENT: THE HON'BLE ACTING CHIEF JUSTICE MRS.MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE

FRIDAY, THE 14TH DAY OF SEPTEMBER 2012/23RD BHADRA 1934

WA.No. 974 of 2012 () IN WPC/270/2012

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AGAINST THE JUDGMENT IN WPC.270/2012 DATED

APPELLANT/ 1st PETITIONER:

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STATE BANK OF TRAVANCORE, KARUNAGAPPALLY BRANCH, REPRESENTED BY ITS MANAGER, PIN-690 518.

BY ADVS.SRI.R.S.KALKURA SRI.KURIAN GEORGE KANNANTHANAM (SR.) SMT.A.V.PRIYA SRI.HARISH GOPINATH SRI.V.VINAY MENON

RESPONDENTS/PETITIONERS AND RESPONDENTS 2 TO 4:

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1. VASANTHA KUMARI, AGED 50 YEARS W/O.RAVI, RESIDING AT RENJIN NIVAS KALLELI BHAGUM P.O., KARUNAGAPPALLY-690 518.

2. RAVI.K.N RENJIN NIVAS, KALLELI BHAGUM P.O. KARUNAGAPPALLY-690 518.

3. THE DISTRICT COLLECTOR KOLLAM-691 101.

4. THE TAHSILDAR (AUTHORISED OFFICER (DTRR) KARUNAGAPPALLY, KOLLAM DISTRICT-690 518.

5. THE VILLAGE OFFICER, KALLELI BHAGUM, VILLAGE OFFICE, KALLELI BHAGUM P.O. KARUNAGAPPALLY-690 518.

R BY ADV. SRI. A SHAFEEK KAYAMKULAM R3 TO R5 BY GOVERNMENT PLEADER, SMT. GIRIJA GOPAL. THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 06/07/2012 , THE COURT ON 14-09-2012 THE SAME DAY DELIVERED THE FOLLOWING: BP

'C.R.'

Manjula Chellur, Ag. C.J. & A.M. Shaffique, J.

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W.A.No. 974 OF 2012

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Dated this the 14th day of September, 2012

Head Note:-

Banking Regulation Act, 1949 - Sections 21 & 35A - directions or guidelines issued by the RBI - Whether binding force of guidelines issued by RBI would result in invalidating a contract which was entered into with volition by third parties with a bank?

Held:- Though the directions of RBI has binding force on the banking companies in general or the banking company in particular, it cannot invalidate the terms of contract where the party voluntarily agrees to waive the benefit accrued to him by virtue of directions or guidelines.

J U D G M E N T

Manjula Chellur, Ag. C.J.

This appeal is preferred by the 1st respondent before the learned single Judge in W.P.(C) No.270/12. Respondents 1 and 2 herein are the parents of one Ms. Jwala who approached the appellant/bank for an education loan. It is not in dispute, a sum of Rs.3,32,000/- was sanctioned as education loan as early as 2004. They borrowed the said loan for the purpose of their daughter's B.Sc. Nursing Course at the Vivekananda College of Nursing, Bangalore. After completing the three years course of study, as the institution imparting the course did not have recognition by the authority concerned, the daughter of the writ petitioners was not allowed to appear for the public examination. Ms. Jwala and other similarly placed students got admitted to other institutions having recognition. Therefore, she joined another college in September 2007. By this time the entire loan was availed of. Later when the loan was not repaid, revenue recovery proceedings were initiated against Ms. Jwala and her father.

2. The writ petitioners approached the learned single Judge challenging the revenue recovery proceedings on various grounds. According to them, in terms of the Scheme, repayment of loan would start only one year after completion of studies or after 6 months of getting employment. The second contention is that the writ petitioners, though parents of Ms.Jwala, are in no way connected with the loan availed of. Therefore, they are not liable for any action under revenue recovery proceedings. The authorities in charge of the revenue recovery proceedings are not entitled to attach the property of the parents of the student and they have only one property, their residential house, where they are residing. It is further contended that the property belongs to the 1st petitioner - the mother of Ms. Jwala, who has nothing to do with the loan and she did not even stand as surety or guarantor for the borrowers.

3. The defence of the appellant/bank is that the duration of the course was 4 years and the loan was availed of in 2004. The moratorium period of one year has already expired and even after the expiry of such period, no repayment was made. Hence the bank was entitled to proceed against the writ petitioners. According to the appellant/bank, loan was availed of by the student as well as the guardian. It is stated that the documents indicate that the 2nd writ petitioner, the father of the student, had also singed the loan papers as guardian of his daughter and therefore the appellant/bank was justified in proceeding against the 2nd writ petitioner as well.

4. After strenuous arguments advanced on behalf of the writ petitioners and the 1st respondent/bank, the learned Single Judge proceeded to consider the entire matter and ultimately allowed the writ petition quashing the revenue recovery proceedings initiated against the parents of Ms. Jwala and held that the appellant bank is entitled to continue recovery proceedings against Ms. Jwala.

5. According to learned Single Judge, a Model Educational Loan Scheme has been approved by the Reserve Bank of India(for short 'RBI') with necessary modification and no surety can be insisted upon for loan upto Rs.4 lakhs. Further it is clear that collateral security or co-obligation of parents/guardian need be furnished only for loans above Rs.4 lakhs. Therefore, the bank was bound by the directions issued by the Reserve Bank of India. Hence the appellant/bank ought not have initiated proceedings under the Revenue Recovery Act against the parents of the students as they will not be liable in any manner if the loan amount was less than Rs.4 lakhs. The learned Single Judge further opined that the loan should have been granted to the student on her own application only and without surety of the parents. Therefore the bank was not entitled to proceed against the 2nd writ petitioner - father of the student who had signed the loan documents and such action on the part of the appellant/bank amounts to illegality.

6. Aggrieved by the judgment of the learned single Judge, the appellant/bank is before us. Learned counsel appearing for the appellant/bank contends that interpretation of the Model Educational Loan Scheme produced at Ext.R1(a) by the learned single Judge was wrong and unsustainable. According to the appellant/bank, the learned single Judge failed to appreciate that though the appellant/bank need not insist security of the parents for the loan upto Rs.4 lakhs; but it would not cover cases where parents voluntarily executed the documents along with their child. The Indian Banks' Association (for short 'IBA') came out with a scheme for granting education loan with the approval of the Reserve Bank of India. It was with the sole purpose of proving financial assistance from the banking institutions to the meritorious students for higher education who are unable to pursue education on account of non-availability of financial support. One of the guidelines is, loan has to be sanctioned subject to re-paying capacity of the parents/students. This was totally ignored by the learned single Judge. It is further contended that the appellant/bank was dealing with public money of depositors which had to be repaid by the bank with interest to the respective depositors. Before sanctioning loan, the appellant/bank makes enquiry about the salary/payment made by the various hospitals in Kerala and such enquiry led to ascertaining the average income expected by the Nurses with B.Sc. degree was between Rs.4,000/- and Rs.6,000/- per mensem. Therefore, they fixed the E.M.I. at Rs.1,712/- for loan of Rs.1 lakh. This proposal was arrived at to accommodate the students to repay the loan in monthly instalments from the income which they received from future employment.

7. According to learned counsel Mr.R.S. Kalkura, the learned single Judge ought not to have gone into the Reserve Bank of India instructions as no challenge was made against such instructions. Further the agreement between the parents and the appellant/ bank was not against public policy. Similarly, surety or guarantor is different from co-obligant or co-borrower. Co-obligant means the liability is equivalent to that of a borrower. The appellant/bank being a commercial organization, their credit decisions have to be taken in accordance with the norms of the bank. It was further contended that in the absence of no express prohibition in the Reserve Bank of India circular or in the Indian Banks' Association Education Scheme that the bank should not obtain loan documents of parents of a student borrower, the learned single Judge was not justified in excluding the liability of the father of the student. The commercial bank cannot take the role of a State as the purpose and obligation of commercial bank in its business transactions is entirely different from the duties of a State.

8. The modification of the Scheme in 2004 as well as in 2011 indicates that loan upto Rs.4 lakhs, parents has to be co-borrowers. In the absence of either IBA or RBI being a party to the proceedings, the interpretation of the Scheme mooted by the IBA with the approval of RBI ought not to have been the subject matter of this judgment. The opinion of the learned single Judge would give premium to the defaulters deterring from repayment of loan. The learned Single Judge, according to the appellant, ignored the law laid down by the Supreme Court in Syndicate Bank v. Estate Officer & Manager [2007 (8) SCC 361]. The 2nd petitioner signed the loan documents as co-borrower and not a surety. This was totally ignored by the learned single Judge. Having executed the loan documents by the father of the borrower, this Court cannot set aside the contract entered into between him and the bank. The interpretation of the learned single Judge is superfluous and render the education loan scheme inviable, is the argument of counsel for the appellant/bank. With these contentions learned counsel for the appellant/bank seriously challenged the opinion of the learned single Judge.

9. As against this, learned counsel appearing for respondents 1 and 2 contended that the fresh Model Education Loan Scheme gives concession to students belonging to lower income group for loan below a sum of Rs.4 lakhs. The writ petitioners' daughter was not able to fulfill the terms of the agreement for reasons beyond her control as she joined the nursing course in another college which postponed the completion of the course by her. Revenue recovery proceedings could not be taken as a re-course as the bank has to file a suit for realising the amount. The amounts from the students could be recovered after the borrower secures a job. Without waiting for such happening in future, they have highhandedly taken revenue recovery proceedings. The appellant/bank, according to them, could only proceed against the borrower and the properties of the parents could not be proceeded against as it is purely an education loan. None of the movables in the house and the residential property was the contribution of the student who availed the loan and therefore the respondents/writ petitioners were in no way liable to pay the loan amount. According to learned counsel, the model scheme aims at providing financial support from the banking system to deserving/meritorious students for pursuing higher education where the parents were not able to financially support them; but not at the cost of the parents. With these arguments, learned counsel for 1st and 2nd respondents sought for dismissal of the writ appeal.

10. Before the learned single Judge the appellant/bank had produced several documents. Ext.R1(a) is the application form for 'Gyan Jyothi Education Loan Scheme'. As per the said document, Ms. Jwala and her father both had signed the document. Ext.R1(b) is the agreement for term loan for education (Gyan Jyothi). This document is also signed by both the student and the guardian i.e., the father. Revival letters sent from time to time as noted at Ext.R1(b)/5 & 6 were also singed by the borrower and the co-obligant. Ext.R1(c) is the education loan scheme brought in 2001. Clause 2(iii) refers to non-insistence of security for loan up to Rs.4 lakhs which reads as follows:

"2. Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division) has considered and decided to accept the Model Scheme prepared by IBA for implementation, subject to the following modifications:

(i) x x x x x

(ii) x x x x x

(iii) No security may be insisted upon for loans upto Rs.4 lakhs. However, for loans above this amount, collateral security of suitable value or co-obligation of parents/ guardians/ third party along with the assignment of future income of the student for payment of instalments may be obtained." 

11. Ext.R1(c)/3 in detail refers to the purpose why such Scheme was introduced, Objectives of the Scheme, applicability of the Scheme, eligibility criteria, quantum of finance, margin, security, rate of interest and other general conditions. This document indicates why such a Scheme has to be introduced. The Finance Minister along with Executives of the Public Sector Banks met on 13.06.2000 and the role of commercial banks in facilitating pursuit of higher education by poor, but meritorious students was highlighted. The meeting brought out a comprehensive educational loan scheme to be adopted by all banks. The objectives of the Scheme was financial support to deserving/meritorious students for pursuing higher education who did not have self financial support. The object is to cater to the poor and needy students to undertake basic education and so as also to the meritorious students to pursue higher/professional/ technical education. So far as the applicability of the Scheme, it could be adopted by all commercial banks and the Scheme provides broad guidelines to the banks for operationalising the educational loan scheme and the implementing bank also has the discretion to make changes suiting to the convenience of the parents to make it more customer friendly. So far as security is concerned, it says, above Rs.2 lakhs collateral security equal to 100% of the loan amount or guarantee of third person known to bank for 100% of the loan can be insisted. It further says, security can be in the form of land/building/Government securities/Public Sector Bonds/Units of UTI, NSC, LIC etc., gold, shares/debentures, bank deposit in the name of student/parent/guardian or in any other third party with suitable margin.

12. Ext.R1(d) is the revised education loan scheme which also refers to various Clauses and so far as security, it says, upto Rs.4 lakhs no security, co-obligation of parent/guardian/spouse as the case may be taken. Ext.R1(e) is the master circular - lending to priority sector. The important Clauses and the main heading "Categories of Priority Sector" as sub-category (iv) which deals with educational loans including loans and advances granted to only individuals for educational purposes upto Rs.10 lakhs for studies in Indian and Rs.20 lakhs for studies abroad.

13. So far as the loan documents are concerned, it is purely an agreement which amounts to contract between parties. In 2001 no security or no third party security could be insisted upon upto Rs.2 lakhs and the revised scheme in 2004 it was enhanced to Rs.4 lakhs. The writ petitioners are banking upon this Clause in the guidelines of the RBI contending that there was no liability on the part of the writ petitioners/ parents to offer themselves as collateral security and therefore the bank was not entitled to take such loan documents from the parents. In the present case it was the father who signed all the loan documents as a co-obligant. Liability of the co-obligant is that of a borrower. He can be termed as co-borrower/sureties of a third party. Such third party could be a parent as well. But in the present case the father of the borrower signed the documents as co-obligant. Once the documents are executed and acted upon the terms and conditions imposed by the lending bank, becomes terms of contract. Having agreed to repay the loan amount as co-obligant, the father who signed the loan document is liable to pay the loan amount and he stands on par with the borrower. The argument is, if the 2nd writ petitioner/ father of the student was not desirous of executing these documents, he ought not to have signed the documents and having signed the documents, he cannot go back as he accepted the terms and conditions imposed by the appellant bank. The learned counsel for the appellant contends having signed the loan documents, the 2nd petitioner, father of the student cannot waive the terms of agreement.

14. This stand of the appellant Bank has to be taken into consideration with reference to several provisions of the statute applicable to the facts of the present case as well as the law laid down by the Apex Court. The Scheme of IBA, so far as educational loan in India, came to be introduced having regard to financial difficulties of the student population to meet the cost of education with the meagre income of the parents. The guidelines framed by IBA came to be circulated by the Reserve Bank of India as per notification dated 28.04.2011. The nationalised Banks are directed to implement the guidelines framed by IBA while granting education loan to students. The question is whether these guidelines have to be implemented in its strict sense by the nationalised banks. In other words, whether they have statutory force or not. No doubt, the Scheme mentioned above indicates attempts to remove the handicap of financial difficulties so far as meritorious students are concerned. Except this financial handicap, if a student suffers from any other deficit like lack of merit it is well within the reach of the Bank to reject the application. The Scheme definitely envisages how loan has to be recovered after completion of the studies i.e. after the moratorium period. Then coming to the guidelines, Reserve Bank of India in its power may from have time to time issue guidelines and directions as it deems fit to banking company in particular or banking companies in general and the same have to be followed by the banking company or companies. This power of RBI cannot be restricted to suo motu decisions. It could be on its own or on representation made to it, modify or cancel any of its directions. As long as the directions or guidelines are in force, the same have to be implemented.

15. The Reserve Bank of India, having the prime banking institution of the country, is entrusted with several powers both directory and regulatory. Therefore, it has the authority of issuing binding guidelines having statutory force keeping in view the interest of the public in general so as to prevent or prohibit working culture in banking affairs from deterioration without prejudice to the security and proper management of the banking institutions. Sections 21 and 35A of the Banking Regulation Act of 1949 are relevant for consideration which read as under:

"21. Power of Reserve Bank to control advances by banking companies.- 

(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.

(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section(1) the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to -

(a) the purposes for which advances may or may not be made,

(b) the margins to be maintained in respect of secured advances,

(c) the maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual,

(d) the maximum amount up to which, having regard to the considerations referred to in clause (c), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and

(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

(3) Every banking company shall be bound to comply with any directions given to it under this section.

xx xx xx xx xx

35A. Power of the Reserve Bank to give directions.- (1) Where the Reserve Bank is satisfied that -

(a) in the public interest; or

(aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub- section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect."

16. Section 21(1) of the Banking Regulation Act entrusts the Reserve Bank with the power to determine a policy in relation to advances which have to be implemented by banking companies generally or banking company in particular. Section 21(2) (d) deals with nature and scope of the directives enabling Reserve Bank of India to give directions in respect of any or all the issues mentioned thereunder. It refers to the purpose for which advance is made or may not be made. It determines the boundaries to be maintained in respect of secured advances. It has the power to determine maximum amount of advance or paid-up capital, reserves etc. It has the power to determine maximum amount up to which guarantees could be insisted upon and it has the power to determine rate of interest and other terms of conditions on which advances or other accommodations could be made in respect of a guarantee. Section 35(A) deals with a situation where Reserve Bank of India if satisfied, in a particular situation, in the interest of banking policy directions could be necessarily issued to banking companies and the same has a binding nature on the banking companies. Sections 21 and 35 refer to directions having statutory force of law to be issued by the Reserve Bank of India.

17. Reliance is placed on ICICI Bank Limited v.Official Liquidator of APS Star Industries Limited and others [(2010) 10 SCC 1]; Sardar Associates and others v. Punjab & Sind Bank and others [(2009) 8 SCC 257]; Canara Bank v. P.R.N. Upadhyaya and others [AIR 1998 SC 3000] and an unreported decision in W.P.(C) Nos. 11556, 12299, 13860 and 11595 of 2001 on the file of High Court of Karnataka dated 19.04.2001.

18. When once we hold that the R.B.I directions issued from time to time have binding effect on the banking companies or a banking company in particular, in case a particular banking institution insists on the parent of the student/ borrower to offer a security, could we consider this as a waiver of benefit envisaged in the guidelines of the RBI and extend the benefit of guidelines to such persons, is the controversy to be considered here. The argument of the learned counsel for the appellant is, having signed the documents as a guarantor or co-obligant it is not open to the father or parent of the student to go back on the agreement and contend that the Bank cannot proceed against them. For this the learned counsel for the appellant relies upon Lachoo Mal v. Radhey Shyam [(1971) 1 SCC 619]; B.O.I. Finance Limited v. Custodian and others [(1997) 10 SCC 488] and Sita Ram Gupta v. Punjab National Bank and others [(2008) 5 SCC 711].

19. [(1971) 1 SCC 619] deals with a situation wherein a landlord waives personal benefit accrued to him by virtue of Section 1-A of Rent Control-U.P.(Temporary) Control of Rent and Eviction Act, 1947. In this case the landlord entered into an agreement with the tenant wherein the old tenant agreed with the landlord that he would vacate the shop room for one month to enable respondent to construct an upstair portion for his own use, but he should resume possession of the shop after the period at the same old rent. After construction the tenant took possession of the premises. When the landlord refused to take the rent, he deposited the rent in terms of the concerned Rent Act. Thereafter the landlord served a notice to quit the shop and later filed a suit for ejectment of the appellant and for arrears of rent. The suit came to be dismissed as the appellant tenant was entitled to protection under Section 3 of the Act. The first appellate Court reversed the opinion of the Trial Court by allowing the appeal and same view was confirmed by the High Court in the second appeal. When the matter came up before their Lordships for consideration, Supreme Court held, the landlord cannot claim the benefit of Section 1-A of the Act on the plea of new construction after January, 1961 as he relinquished his personal benefit by the agreement with the appellant.

20. (1997) 10 SCC 488 refers to Section 23 of the Contract Act. In this case the appellant bank entered into a contract with different brokers for the purchase and sale of certain securities which were not listed on any Stock Exchange. The question that arose before their Lordships was, if transaction arising out of an agreement envisages to do an act which is against the statute, if signs the agreement as valid, then it has to be regarded as valid notwithstanding the illegality of the agreement. Paragraphs 26 to 33 are relevant which read as under:

"26. There can obviously be no doubt, as is evident from the plain reading of the said provisions, that the directions issued under Sections 21 and 35A are binding on the banking companies. Section 36(1)(a) (1)(b), on which reliance is placed, reads thus :

"36(1) The Reserve Bank may -

(a) caution or prohibit banking companies generally or any banking company in particular against entering into any particular transaction or class of transactions and generally give advice to any banking company;

(b) on a request by the companies concerned and subject to the provisions of [Section 44A] assist as intermediary or otherwise in proposals for the amalgamation of such banking companies."

27. Referring to Section 36(1)(a), we find that it empowers the Reserve Bank to "caution or prohibit" the banking companies from entering into any particular type of transaction or generally to give advice to the said banking companies. This provision not only enables the Reserve Bank to assume an advisory role but it also gives it the power to prohibit a banking company against entering into any particular transactions or class of transactions. The use of words "caution or prohibit" in Section 36(1)(a) clearly implies that when the Reserve Bank of India prohibits the banking companies from entering into any particular transaction then such a direction which is issued would be binding on the banks and has to be complied with. While the Reserve Bank of India has the power, under Section 36(1)(a) of the Act, to give advice or to caution the banking companies which may not be binding on the banking companies, but when the Reserve Bank prohibits the banking companies against their entering into any particular transaction or class of transactions, the said prohibition has to be regarded as being binding. The power to prohibit, given by Section 36, will be meaningless if it was not meant to be binding on the banking companies.

28. It is no doubt true that the circular dated 15-4-1987 states that the banks are "advised" to follow the guidelines given thereunder, but para 2A of the said circular clearly contains the prohibition relating to the buy -back arrangements. Similarly, under para 2B, which is applicable in the present case, by use of the words "should be" the circular clearly implies that the direction contained thereunder is meant to be binding. The word "advised" used in para 2 of the first circular, cannot be read in isolation. Reading the said circular, as a whole, it can leave no doubt in any one's mind that what was stated in the said document was meant to be binding on the banking companies and, was not merely an 'advice' or a 'caution' which could be ignored.

29. It was then submitted that even if it is held that the said circulars were binding they could only bind the banks and not the third parties. The submission was that by contravening the direction contained in the said circulars, the contracts which were entered into between the banks and the third parties could not be invalidated and the only result of such contravention would be the levy of penalty under Section 46 of the said Act.

30. It is not in dispute that the said circulars which have been issued were not made public. The said circulars were confidential documents and required the banking companies to transact their business in a particular manner namely they should not enter into any buy-back contracts which were not according to the terms of the circulars. The Act itself does not provide that, where the directions issued by the confidential circulars are violated by the bank, the contracts entered into with the third parties would in any way be invalidated. The said circulars also, did not say that the consequence of the directions contained therein not being followed by the Banking Companies will result in such transaction being regarded as void. Indeed, no such stipulation could be made which would adversely affect third parties to whom no directions have been or could be issued and who were not aware of such directions issued to the banks.

31. It will be appropriate at this stage, to consider the decision of this Court in the case of Banarsi Das v. Cane Commissioner, 1963 Supp (2) SCR 760 : (AIR 1963 SC 1417). In that case an agreement was entered into between the appellant and the cane marketing society for supply of sugarcane. The appellant claimed that there was short supply of sugarcane and the society moved the Cane Commissioner for arbitration. These proceedings were sought to be challenged by the appellant by contending that the Cane Commissioner had no right to assume the office of arbitrator in this dispute because no valid agreement had been entered into between the parties, as contemplated by Section 18(2) of the Uttar Pradesh Sugar Factories Control Act, 1938 and in the Form XII as prescribed under the rules made thereunder. It was also contended that there were some blanks which were left to be filled in the prescribed form and it also did not have the signature of any representative of the sugar mill. On behalf of the appellant it was contended in this Court that the provisions of Section 18(2) of Uttar Pradesh Sugar Factories Control Act were mandatory and had to be followed to the letter. Inasmuch as the Act and the Rules prescribed a penalty for breach of the said section, it could not but be regarded as mandatory in all its parts. Therefore, assuming that the appellant may be guilty and could be punished but, it was submitted, the mandatory provision not having been followed no valid contract could come into existence and, consequently, the Cane Commissioner had no jurisdiction to proceed in the matter for appointment of an arbitrator. While repelling the contention, this Court at page 780 observed as follows :

"This rule has been applied in many cases both in India and in England. In State of U.P. v. Manbodhan Lal Srivastava (AIR 1957 SC 912), this Court observed that no general rule can be laid down but the object of the statute must be looked at and even if the provision be worded in a mandatory form, if its neglect would work serious general inconvenience or injustice to persons who have no control over those entrusted with the duty and at the same time would not promote the main object of the Legislature, it is to be treated only as directory and the neglect of it though punishable would not affect the validity of the acts done. These observations have been followed in other cases and recently in Bhikraj Jaipuria v. Union of India (AIR 1962 113), it was observed that where a statute requires that a thing shall be done in a particular manner or form but does not itself set out the consequences of non-compliance the question whether the prescription of law shall be treated as mandatory or directory could only be solved by regarding the object, purpose and scope of that law. If the statute is found to be directory a penalty may be incurred for non-compliance but the act or thing done is regarded as good. It is unnecessary to multiply these cases which are based upon the statement in Maxwell which is quoted over and over again."

32. It will also be useful to refer to the decision of the High Court of Australia in the case of Yango Pastoral Company Pty. Limited v. First Chicago Australia Limited, 1978 (139) CLR 411 where Mason, J. made observations in this regard. That was a case where Section 8 of the Banking Act, 1959 prohibited a body corporate from carrying on the business of banking without a licence. The question arose whether a mortgage and guarantees given to an unlicensed corporation in the course of carrying on business were void or unenforceable. The High Court unanimously held that nothing in the statute made them void and that the separate question of illegal performance should be determined by examining the terms of the statute to determine the impact of illegality on the enforceability of the contract. At p. 428, it was observed as follows :

"The weighing of considerations of public policy in this case and the decision in favour of enforcing the contract is influenced by the form of the particular legislation. In this case the Act, as I have mentioned, is to a large extent directed to aiding the Government in executing its fiscal policy rather than regulating the relationship between banker and customer per se, a feature which lends support for the view that the provision of a large recurrent penalty for offences against Section 8 is Parliament's determination of the consequences of breach of the section and as the only legal consequences thereof. There is much to be said for the view that once a statutory penalty has been provided for an offence, the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished - see my judgment in Jackson v. Harrison, (1978) 138 CLR 438, CLR at p. 452. See also the suggestions that the principle cannot apply to all statutory offences (Beresford v. Royal Insurance Co. Ltd. (1937) 2 KB 197, KB at P.222, per Lord Wright; Marles v. Philip Trant and Sons Ltd., (1954) 1 QB 29, at p. 37, per Denning L. J., and that it would be a curious thing if the offender is to be punished twice, civilly as well as criminally (St. John Shipping Corporation v. Joseph Rank Ltd., (1957) 1 QB 267, QB at p. 292, per Devlin J.). The main considerations from which the principle ex turpi causa arose can be seen in the reluctance of the Courts to be instrumental in offering an inducement to crime or removing a restraint to crime; Beresford's case (1938 AC 586) at pp 586, 599; Amicable Society v. Boiland (1830) 4 Bligh (NS) 194 at p. 211.

However, in the present case Parliament has provided a penalty which is a measure of the deterrent which it intends to operate in respect of non compliance with Section 8. In this case it is not for the Court to hold that further consequences should flow, consequences which in financial terms could well far exceed the prescribed penalty and could even conceivably lead the plaintiff to insolvency with resultant loss to innocent lenders or investors. In saying this I am mindful that there could be a case where the facts disclose that the plaintiff stands to gain by enforcement of rights gained through an illegal activity far more than the prescribed penalty. This circumstance might provide a sufficient foundation for attributing a different intention to the legislature. It may be that the true basis of the principle is that the Court will refuse to enforce a transaction with a fraudulent or immoral purpose; Beresford v. Royal Insurance Co. Ltd., (1937) 2 KB 197 at p. 220. On this basis the common law principle of ex turpi causa can be given an operation consistent with, though subordinate to, the statutory intention, dying relief in those cases where a plaintiff may otherwise evade the real consequences of a breach of a statutory prohibition."

33. The aforesaid principles will clearly be applicable in the present case as well. The non-compliance of the directions issued by the Reserve Bank may result in prosecution/or levy of penalty under Section 46, but it cannot result in invalidation of any contract by the bank with the third party. If the contention of the Custodian is accepted it will result in invalidation of agreements by the banks, even where the third parties may not be aware of the directions which are being violated. To give an example if the Reserve Bank by confidential circulars fixes the limit in excess of which the banks cannot give any loan but, without informing the third party, the bank while exceeding its limit gives a loan which is then utilised by the bank's customer. It will be inequitable and improper to hold that as the directions of the Reserve Bank had not been complied with by the bank, the grant of loan cannot be regarded as valid and, as a consequence thereof, the customer must return the amount received even though he may have utilised the same in his business. Yet another instance may be where the bank advances loan by charging interest at a rate lower than the minimum which may have been fixed by the Reserve Bank, in a direction issued under Section 36(1)(a). As far as the customer is concerned, it may not be aware of the direction fixing the minimum rate of interest. Can it be said, in such a case, that the advance of loan itself was illegal or that the bank would be entitled to receive the higher rate of interest? In our opinion, it will be wholly unjust and inequitable to hold that such transactions entered into by the bank with a customer, which transactions are otherwise not invalid, can be regarded as void because the bank did not follow the directions or instructions issued by the Reserve Bank of India."

21. Sita Ram Gupta v. Punjab National Bank [(2008) 5 SCC 711] was a case where the liability of guarantor and the protection available to the guarantor under Section 130 of the Contract Act came up for consideration, where a defence was raised on behalf of the guarantor that due to waiver of the right he was not entitled for the protection available under Section 130 of the Contract Act. Having executed guarantee documents it was held that it was not open to the appellant guarantor to revoke guarantee as the appellant had agreed to treat the guarantee as a continued one. Relevant paragraphs are 7, 8 and 10 which read as under:

"7. We have carefully examined the submissions made on behalf of the parties and also the relevant clauses in the agreement of guarantee. In our view, the High Court was perfectly justified in holding that the appellant was liable to pay the decretal amount to the Bank in view of the clause, as mentioned herein earlier, in the agreement of guarantee itself. The agreement of guarantee clearly provides that the guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by that fact the at any time, the said accounts may show no liability against the borrower or may even show a credit in his favour but shall continue to be a guarantee and remain in operation in respect of all subsequent transactions. This was an agreement entered into by the appellant with the Bank, which is binding on him. Therefore, the question arises whether the statutory provision under Section 130 of the Act shall override the agreement of guarantee. In our view, the agreement cannot be said to be unlawful nor the parties have alleged that it was unlawful either before the trial court or before the High Court. Let us, therefore, keep in mind that the agreement of guarantee entered into by the appellant with the Bank was lawful.

8. The question is whether the appellant, having entered into such an agreement of guarantee with the Bank, had waived his right under the Act. In our view, the High Court has rightly held and we too are of the view that the appellant cannot claim the benefit under Section 130 of the Act because he had waived the benefit by entering into the agreement of guarantee with the Bank. In Lachoo Mal v. Radhey Shyam (1971) 1 SCC 619 this Court observed that the general principle is that every one has a right to waive and to agree to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity which may be dispensed with without infringing any public right or public principle. In Halsbury's Laws of England, Vol.8, 3rd Edn., it has been stated in Para 248 at p.143 as under:

"248. Contracting out.- As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by an Act of Parliament, or, as it is said, can contract himself out of the Act, unless it can be shown that such an agreement is in the circumstances of the particular case contrary to public policy. Statutory conditions may, however, be imposed in such terms that they cannot be waived by agreement, and, in certain circumstances, the legislature has expressly provided that any such agreement shall be void."

xx xx xx xx

10. Keeping this principle in mind, we now took at the clause in the agreement of guarantee, as noted hereinearlier. There cannot be any dispute that the appellant had clearly agreed that the guarantee that he had entered into with the Bank was a continuing guarantee and the same was to continue and remain in operation for all subsequent transactions. Having entered into the agreement in the manner indicated above, in our view, it was, therefore, not open to the appellant to turn around and say that in view of Section 130 of the Act, since the guarantee was revoked before the loan was advanced to Defendants 1 to 4 and 6, he was not liable to pay the decretal amount as a guarantor to the Bank as his guarantee had already stood revoked. In this view of the matter, we are not in a position to accept the submissions of the learned counsel for the appellant and we hold that in view of the nature of guarantee entered into by the appellant with the Bank, the statutory provisions under Section 130 of the Act shall not come to his help. The findings arrived at by the High Court while deciding the first appeal were that the amount shown due in the accounts of the Bank against the appellant and the defendants was neither cleared by the defendants nor by the appellant. Therefore, even if a letter was written to the Bank by the appellant on 31.07.1980 withdrawing the guarantee given by him, it was contrary to the clause in the agreement of guarantee, as noted hereinearlier. Therefore, it was not open to the appellant to revoke the guarantee as the appellant had agreed to treat the guarantee as a continuing one and was bound by the terms and conditions of the said guarantee. For this reason, it is difficult to accept the submissions of the learned counsel for the appellant that in view of the statutory provision under Section 130 of the Act, after the revocation of the guarantee by the appellant, he was not liable to pay the decretal amount to the Bank. No other point was raised by the learned counsel for the appellant. Accordingly, there is no merit in this appeal. The appeal is thus dismissed. There will be no order as to costs."

22. Reliance was also placed on Waman Shriniwas Kini v. Ratilal Bhagwandas & Co. [AIR 1959 SC 689=1959 Supp (2) SCR 217]. The relevant paragraphs are 9, 10, 11, 12 and 13 which read as under:

"9. The respondent's suit for ejectment was brought under S. 13(1)(e) which provides:

"Notwithstanding anything contained in this Act (but subject to the provisions of section 15), a landlord shall be entitled to recover possession of any premises if the Court is satisfied

...... ...... ...... ...... ...... ........

...... ...... ...... ...... ...... ........

...... ...... ...... ...... ...... ........

(e) that the tenant has, since the coming into operation of this Act, sublet the whole or part of the premises or assigned or transferred in any other manner his interest therein."

10. It was contended that S. 13(1)(e) had to be read separately and not in conjunction with S. 15 of the Act. The section itself makes it quite clear that it is subject to the provision of S. 15 and the two sections must therefore be read together. The appellant pleaded that under the agreement between him and the respondent he was entitled to sublet the premises. Such an agreement, in our opinion, is void because of the provisions of S. 15 of the Act and S. 23 of the Contract Act and enforcement of the agreement would produce the very result which the law seeks to guard against and to prevent and by sustaining the plea of the appellant the Court would be enforcing an agreement which is prohibited and made illegal.

11. The appellant relied on the maxim in pari delicto potior est conditio posidentis to support his plea that the respondent could not enforce his right under S. 13(1)(e). But this maxim "must not be understood as meaning that where a transaction is vitiated by illegality the person left in possession of goods after its completion is always and of necessity entitled to keep them. Its true meaning is that, where the circumstances are such that the Court will refuse to assist either party, the consequence must, in fact, follow that the party in possession will not be disturbed". (Per Du Pareq L. J. in Bowmakers Ltd., v. Barnet Instruments Ltd., 1945-l KB 65, 72. The respondent in the present case did not call upon the Court to enforce any agreement at all. When the instrument of lease was executed and possession given and subletting done it received its full effect; no aid of the Court was required to enforce it. The respondents' suit for ejectment was not brought for the enforcement of the agreement which recognised subletting but he asked the Court to enforce the right of eviction which flows directly from an infraction of a provision of the Act (S. 15) and for which the Act itself provides a remedy. There is thus a manifest distinction between this case where the plaintiff asked the Court to afford him a remedy against one who by contravening S. 15 of the Act has made himself liable to eviction and those cases where the Court was called upon to assist the plaintiff in enforcing an agreement the object of which was to do an illegal act. The respondent is only seeking to enforce his rights under the statute and the appellant cannot be permitted to assert in a Court of justice any right founded upon or growing out of an illegal transaction: Gibbs and Sterret Manufacturing Co. v. Brucker, (1884) 111 US 597, 601: 28 Law Ed 534, 535. In our opinion S. 15 of the Act is based on public policy and it has been held that if public policy demands it even an equal participant in the illegality is allowed relief by way of restitution or rescission, though not on the contract.

12. It was next contended that S. 13(1) (e) is a provision for the protection of private rights of the landlord and unless there is in the Act itself any provision to the contrary such rights as far as they were personal rights may be parted with or renounced by the landlord. In other words the right of the respondent to sue for ejectment on the ground of subletting being a personal right for his benefit, the landlord must be taken to have waived it as by an express contract he had allowed the tenant to sublet and consequently he could not evict the appellant under S. 13(1)(e) of the Act.

13. The plea of waiver was taken for the first time in this Court in arguments. Waiver is not a pure question of law but it is a mixed question of law and fact. This plea was neither raised nor considered the courts below and therefore ought not to be allowed to be taken at this stage of the proceedings. But it was argued on behalf of the appellant that according to the law of India the duty of a pleader is to set up the facts upon which he relied and not any legal inference to be drawn from them and as he had set up all the circumstances from: which the plea of waiver could be inferred he should be allowed to rise and argue it at this stage even though it had not been raised at any previous stage not even in the statement of case filed in this Court and he relied upon Gouri Dutt Ganesh Lal Firm v. Madho Prasad, AIR 1943 PC 147. Assuming that to be so and proceeding on the facts found in this case the plea of waiver cannot be raised because as a result of giving effect to that plea the Court would be enforcing an illegal agreement and thus contravene the statutory provisions of S. 15 based on public policy and produce the very result which the statute prohibits and makes illegal. In Surajmull Nagoremull v. Triton Insurance Co., 52 Ind App 126: (AIR 1925 PC 83) Lord Sumner said: "No Court can enforce as valid that which competent enactments have declared shall not be valid, nor is obedience to such an enactment a thing from which a Court can be dispensed by the consent of the parties, or by a failure to plead or to argue the point at the outset: Nixon v. Albion Marine Insurance Co., (1867) 2 Ex 338. The enactment is prohibitory. It is not confined to affording a party a protection of which he may avail himself or not as he pleases. It is not framed solely for the protection of the revenue and to be enforced solely at the instance of the revenue officials, nor is the prohibition limited to cases for which a penalty is exigible."

In the instant case the question is not merely of waiver of statutory rights enacted for the benefit of an individual but whether the Court would aid the appellant in enforcing a term of the agreement which S. 15 if the Act declares to be illegal. By enforcing the contract the consequence will be the enforcement of an illegality and infraction of a statutory provision which cannot be condoned by any conduct or agreement of parties. Dhanukdhari Singh v. Nathima Sahu, 11 Cal WN 848, 852. In Corpus Juris Secundum Vol. 92 at p. 1068 the law as to waiver is stated as follows:-

"....a waiver in derogation of a statutory right is not favoured, and a waiver will be inoperative and void if it infringes on the rights of others, or would be against public policy or morals. . . . .. .. . ..."

In 1945-1 KB 65 the same rule was laid down. Mulla in his Contract Act at page 198 has stated the law as to waiver of an illegality as follows:-

"Agreements which seek to waive an illegality are void on grounds of public policy. Whenever an illegality appears, whether from the evidence given by one side or the other, the disclosure is fatal to the case. A stipulation of the strongest form to waive the objection would be tainted with the vice of the original contract and void for the same reasons. Wherever the contamination reaches, it destroys."

This, in our opinion, is a correct statement of the law and is supported by high authority. Field J. in Oscanyan v. Winchester Arms Co., (1881) 103 US 261 (268): 26 Law Ed 539 quoted with approval the observation of Swayne J. in Hall Coppell, (1872) 7 Wallace 542:-

"The principle is indispensable to the purity of its administration. It will not enforce what it has forbidden and denounced. The maxim Ex dolo malo non oritur actio, is limited by no such qualification. The proposition to the contrary strikes us as hardly worthy of serious refutation. Wherever the illegality appears, whether the evidence comes from one side or the other, the disclosure is fatal to the case. No consent of the defendant can neutralise its effect. A stipulation in the most solemn form, to waive the objection, would be tainted with the vice of the original contract, and void for the same reasons. Wherever the contamination reaches, it destroys."

Waiver is the abandonment of a right which normally everybody is at liberty to waive. A waiver is nothing unless it amounts to a release. It signifies nothing more than an intention not to insist upon the right. It may be deduced from acquiescence or may be implied. Chitty on Contract 21st Ed. p. 381 Stackhouse v. Barnston, (1805) 10 Ves 453, 466: 32 ER 921. But an agreement to waive an illegality is void on grounds of public policy and would be unenforceable."

23. After referring to the above decisions it is crystal clear that the directions or guidelines issued by the RBI have to be followed in respect of all the items referred to at Section 21 and so also Section 35A of the Act. Once in the public interest or in the interest of banking policy pertaining to advances, directions are given, if such directions by volition is waived by a party what would happen has to be seen. The principle laid down in the decisions above would confirm the binding nature of the directions or guidelines issued from time to time by RBI which binds the banking companies in general or a banking company in particular. There cannot be any serious dispute with regard to the binding force of these guidelines issued by RBI. The controversy is whether such binding force would result in invalidating a contract which was entered into with volition by third parties with a bank.

24. The respondent parent contends, in spite of signing the agreement while availing loan by the daughter of the respondents, the same is not binding on the 2nd respondent as it is against the guidelines of RBI. According to the Bank, such benefit is waived voluntarily by the 2nd respondent, therefore it is not open to him to contend that the directions or guidelines alone would apply and not the terms of agreement. The right envisaged under the guidelines can it be waived by the parties to the agreement? Waiver is nothing short of abandoning a right.

25. We have two judgments of constitutional Bench of Apex Court, i.e. 1959 Supp (2) SCR 217 and (1997) 10 SCC 488 stated supra. In 1959 Supp (2) SCR 217, the question was whether Court can insist a party to enforce the terms of agreement where terms or conditions could be declared as illegal by virtue of Section 15 of the Tenancy Act. Their Lordships held that on enforcement of contract, consequences will be enforcement of illegality and infringement of a statutory provision which cannot be condoned by any contract or agreement by parties.

26. In (1997) 10 SCC 488, paragraph 33, as indicated above, clearly envisages the subsequent view of the Apex Court which says, if there is disobedience of directions of RBI, it may result in prosecution or levy of penalty but it cannot result in invalidation of any contract by the bank with the third party. As far as the customer is concerned, he may be aware of the directions or not, and their Lordships held that it would be wholly unjust and inequitable to hold that such advances to a third party in violation of the directions of RBI, which are otherwise not invalid, can be regarded as void only because bank did not follow the directions or instructions issued by RBI, whereas the directions issued are required to be complied with by banking companies only and do not have any binding force on third parties. Their Lordships said, even if the bank had entered into an agreement which was prohibited by the directions of RBI, it would not invalidate the contracts though the infringement of directions may lead to serious action against defaulting bank.

27. In that view of the matter, we are of the opinion, though the directions of RBI has binding force on the banking companies in general or the banking company in particular, it cannot invalidate the terms of contract where the party voluntarily agrees to waive the benefit accrued to him by virtue of directions or guidelines. In that view of the matter, we have to hold that the 2nd respondent-father cannot take protection that he need not honour the terms of loan agreement having executed the loan papers as co-obligant along with his daughter Ms.Jwala. So as far as the 1st respondent-Mother of Ms.Jwala, it is made clear that the Bank cannot proceed against her as she is neither a co-obligant nor surety for the loan of her daughter and husband.

Accordingly, we allow the writ appeal setting aside the judgment of the learned Single Judge.

Manjula Chellur, Ag. Chief Justice.

A.M. Shaffique, Judge.

Nan/ttb