Karnataka HC Upholds DICGC's Priority Right to Reclaim Insurance Money; Dismisses Challenge to Constitutional Validity of Amendment Act [Read Order]

Sri Guru Raghavendra Sahakara Bank (Ni) Tevanidarara Sangha, the Appellant, challenged the constitutional validity of Section 18A(5) and Section 21(3) & (4) of the DICGC Act. The challenge arose after the DICGC demanded repayment of approximately Rs. 712 crores paid to depositors of the stressed Sri Guru Raghavendra Sahakara Bank. The Appellant argued that, if enforced, this priority claim would deplete the Bank’s remaining assets (approx. Rs. 576 crores), leaving nothing for 8,000 depositors holding deposits exceeding the insured limit of Rs. 5 lakhs.

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The Appellant contended that the provisions were "colorable legislation" exceeding the scope of "Insurance" under Entry 47 of List I. It was argued that the DICGC acts as a monopoly and collects premiums on deposits exceeding Rs. 5 lakhs despite capping liability at that amount, amounting to unjust enrichment.

The Coram of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha observed that the DICGC is a sui generis body created for a public purpose, and the insurance provided under the Act is a statutory guarantee, not a mere contract of insurance. Relying on Supreme Court precedents like Deposit Insurance and Credit Guarantee Corporation v. Ragupathi Ragavan and Shayara Bano v. Union of India, the Court examined the challenge on the ground of "manifest arbitrariness."

The Court observed:

“When we consider that the resources of the Corporation are required for public purposes, the impugned provisions, which accord a higher priority for repayment to the Corporation over other liabilities, cannot be considered as manifestly arbitrary. It is necessary to bear in mind that the appellant’s challenge is to the constitutional validity of a statutory enactment.”

The Court held that the priority accorded to the Corporation is in line with the object of ensuring its resources are replenished to benefit a maximum number of depositors and provide stability to the banking industry. It found a clear nexus between the legislation and its object. The Court further held that the question of premium quantum is a matter of policy for the rule-making authorities and does not warrant judicial interference.

In view of this, the High Court found no merit in the appeal. It upheld the order of the Single Judge and dismissed the Writ Appeal, affirming that the DICGC is entitled to recover the amounts paid to depositors with priority over other classes of liabilities.

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