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Supreme Court holds that the SARFAESI Act will apply to Co-Operative Banks

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On 5.05.2020, in the case of Pandurang Ganpati Chaugule vs. Vishwasrao Patil Murgud Sahakari, a constitution bench headed by Justice Arun Mishra held that co-operative banks come under the purview of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) as well as under Entry 45 of List I of the Seventh Schedule of the Constitution.

Brief facts of the case

On 13.8.2008, Pandurang Ganpati Chougule – appellant, questioned the action of Vishwasrao Patil Murgud Sahakari Bank Limited under the SARFAESI Act.

The matters have been referred to a larger bench given conflicting decisions in Greater Bombay Co-op. Bank Ltd. vs. United Yarn Tex. Pvt. Ltd. and Ors.

The Parliament’s competence to amend Section 2(c) of the SARFAESI Act by adding sub-clause ‘(iva) a multistate cooperative bank’ has also been questioned. The issue arises whether the definition of ‘banking company’ contained in Section 5(c) of the Banking Regulation Act, 1949 (“BR Act”) covers cooperative banks registered under the State law and also multistate cooperative societies under the Multi-State Cooperative Societies Act, 2002 (for short, ‘the MSCS Act’).

Arguments in the court

Shri Devansh A. Mohta, learned counsel appearing on behalf of the appellants, raised the following arguments:

The scope of banking under Entry 45 of List I is to be interpreted in light of the definition of expression ‘banking’ in terms of Section 5(b) of the BR Act, 1949. He has referred to Rustom Cavasjee Cooper and Ors. vs. Union of India in which this Court held that ‘banking’ under Entry 45 did not include ‘banker’ or ‘bank.’ Banking is an activity. Entry pertains to the activity of banking alone.

‘Cooperative societies’ are expressly excluded from the purview of the Parliament’s competence being a State subject under Entry 32 of List II. He has referred to the Statement of Objects and Reasons, which brings out that the BR Act, 1949, was only to regulate the banking business relatable to Entry 45 and not to regulate the cooperative societies.

The business of securitisation is not a banking business. Under Section 2(1)(l) of the SARFAESI Act, a ‘financial asset’ means debt or receivable and includes inter alia any financial asset. Section 2(1)(ha) defines ‘debt’ to mean the same as defined in clause (g) of Section 2 of the RDB Act, 1993. Financial assistance to members is another form of business that is not a banking business.

Supreme Court’s View

The court has systematically broken down the following questions that arose for consideration:

  1. Whether ‘cooperative banks’, which are cooperative societies also, are governed by Entry 45 of List I or by Entry 32 of List II, of the Seventh Schedule of the Constitution of India, and to what extent?
  2. Whether ‘banking company’ as defined in Section 5(c) of the BR Act, 1949 covers cooperative banks registered under the State Cooperative Laws and also multistate cooperative societies?
  3. Whether cooperative banks both at the State level and multistate level are ‘banks’ for applicability of the SARFAESI Act? Whether provisions of Section 2(c) (iv a) of the SARFAESI Act on account of inclusion of multistate cooperative banks and notification dated 28.1.2003 notifying cooperative banks in the State are ultra vires?

Regarding question 1,

The court opined that the definitions of ‘banking’ and ‘banking company’ are contained in Section 5(b) and 5(c) of the BR Act, 1949 respectively, and when reading with Section 56(a), it means cooperative banks also. The cooperative bank falls within the definition of Section 5(c), and its activity is of banking, and in addition to the business of banking, a cooperative bank may engage in any of the business as enumerated in Section 6.

Regarding question 2,

The court observed that the cooperative banks, which are governed by the BR Act, 1949, are involved in banking activities within the meaning of Section 5(b) thereof. They accept money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking. They perform commercial functions. A society shall receive deposits and loans from members and other persons. They give loans also, and it is their primary function. Thus, they are covered under ‘banking’ in Entry 45 of List I.

Regarding question 3,

Since the activity of a cooperative bank is banking regulated by the law enacted within the relatable Entry 45 of List I, the court found no reason as to why the Parliament lacked the competence to enact the SARFAESI Act and to provide a procedure for the speedy recovery of dues. The SARFAESI Act also covers the activities undertaken by the cooperative banks.

The  court stated, “We find that the SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be a colourable piece or overinclusive or beyond the competence of the Parliament.”

Court’s Decision

The court has answered the above questions in the following manner:

Firstly, the cooperative banks registered under the State legislation and multistate level cooperative societies registered under the MSCS Act, 2002 concerning ‘banking’ are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India.

Secondly, the cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to ‘Banking’ in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.

Thirdly, the cooperative banks under the State legislation and multistate cooperative banks are ‘banks’ under section 2(1)(c) of SARFAESI Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the Act, legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.

Lastly, the Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under Section 13 of the SARFAESI Act, 2002 concerning cooperative banks. The provisions of Section 2(1)(c)(iva), of the Act, adding “ex abundanti cautela”, ‘a multistate cooperative bank’ and the notification dated 28.1.2003 issued with respect to the cooperative banks registered under the State legislation are not ultra vires. is now on Telegram. Follow us for regular legal updates and judgements from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe for our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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