G.K. Gururajrao Vs Union of India (Karnataka High Court)
DICGC was entitled to recover the insured amounts paid to depositors in priority and challenge to constitutional validity of Amendment Act was dismissed
Conclusion: Reimbursement of interim payments from insured banks in priority to other liabilities was a valid exercise of legislative competence. The argument that the DICGC, being an insurer, was limited to the rights of subrogation and could not rank higher than the insured depositors was rejected.
Held: The present writ appeal arose from the financial collapse of a co-operative bank whose operations were restricted by the Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949, following discovery of massive financial irregularities, fictitious loan accounts, diversion of funds and ever-greening of accounts. The Deposit Insurance and Credit Guarantee Corporation (DICGC), pursuant to the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021, paid insured amounts up to ₹5 lakhs to eligible depositors under Section 18A of the DICGC Act and thereafter sought reimbursement from the bank in terms of Section 21 of the Act. Appellant-association representing depositors challenged the constitutional validity of Sections 18A(5), 21(3) and 21(4) of the DICGC Act, 1961, contending that the provisions unlawfully accorded preferential repayment rights to DICGC over remaining uninsured depositors and violated Articles 14, 19, 21, 38, 43-B and 300-A of the Constitution. It was argued that under the principles of insurance and subrogation, DICGC could not claim a higher priority than the depositors whose claims it had satisfied; that the legislation amounted to colourable exercise of power beyond Entry 47 of List I; that the premium mechanism resulted in unjust enrichment; and that the impugned provisions were manifestly arbitrary. Dismissing the appeal, the Court held that the DICGC Act was enacted with the laudable object of protecting small depositors and maintaining banking stability and that the impugned provisions had a direct nexus with the legislative purpose. The Court observed that the Corporation functions under a special statutory regime and was not merely an ordinary commercial insurer governed strictly by private law principles of subrogation. It was held that the right of DICGC to recover amounts paid to depositors flows from statutory prescription and not solely from equitable subrogation and, therefore, Parliament was competent to accord preferential repayment status to the Corporation. The Court further held that the provisions could not be termed manifestly arbitrary merely because they granted priority to DICGC, since such priority ensured replenishment of public insurance funds for protection of depositors generally and preservation of confidence in the banking system. The challenge based on Article 300-A was also rejected on the ground that repayment priority was expressly authorized by law. Upholding the validity of Sections 18A(5), 21(3) and 21(4) of the DICGC Act and the corresponding Regulations, the Court concluded that DICGC was entitled to recover the insured amounts paid to depositors in priority and that the impugned statutory framework suffered from no constitutional infirmity.
1. The appellant has filed the present appeal impugning the order dated 01.09.2025 (hereinafter ‘the impugned order’) passed by the learned Single Judge of this Court rejecting Writ Petition No.2991 of 2023 (GM-RES), captioned G.K. Gururaja Rao v. Union of India and Others. The appellant had filed the said writ petition under Article 226 of the Constitution of India, inter alia impugning Section 18A(5) and Section 21(3) and (4) of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (hereinafter referred to as ‘the Act’), to the extent that those provisions entitle the respondent No.3. (hereinafter referred to as ‘the Corporation’ for short) to the reimbursement of the amount in aid paid to depositors, as being violative of Articles 14, 19, 21, 38, 43-B and 300-A of the Constitution of India.
