SC: SARFAESI Act, 2002 applies to co-operative banks also

A Constitution Bench of the Hon’ble Supreme Court, on 5th May  2020, in the matter of Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited pronounced that the co­-operative banks under the State legislation and multi­State co­-operative banks are ‘banks’ under section 2(1)(c) of the SARFAESI Act, 2002.

The Hon’ble Supreme Court observed that:

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?

Deep and pervasive control by the Reserve Bank of India is provided on primary credit society, which is involved in banking. As per the provisions of the Banking Regulation Act, 1949, no business can be done by any co­operative society without obtaining a licence from the Reserve Bank of India. The very existence of the co­-operative banks is dependent and is governed by the Reserve Bank of India Act as well as the Banking Regulation Act, 1949 (Para 26)

Banking under Entry 45 of List I covers ‘co­operative banks’. The activity of the co­operative bank is covered under Section 5(1)(b) of the Banking Regulation Act, 1949. (Para 38)

No doubt about it that every commercial activity cannot be brought within the scope of ‘banking’ in Entry 45 of List I. ‘Banking’ itself has a wide meaning, and the activity of co­operative banks is definitely, beyond an iota of doubt, covered by Entry 45 of List I. (Para 38)

Recovery of dues would be an essential function of any banking institution and the Parliament can enact a law under Entry 45 of List I as the activity of banking done by co­operative banks is within the purview of Entry 45 of List I. Obviously, it is open to the Parliament to provide the remedy for recovery under Section 13 of the SARFAESI Act. Co­operative bank’s entire operation and activity of banking are governed by a law enacted under Entry 45 of List I, i.e., the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934 under Entry 38 of List I. (Para 47)

The activity of banking by such bankers is covered by Entry 45 of List I considering the Doctrine of Pith and Substance, and also considering the incidental encroachment on the field reserved for State is permissible. (Para 68)

The concept of regulating non­banking affairs of society and regulating the banking business of society are two different aspects and are covered under different Entries, i.e., Entry 32 of List II and Entry 45 of List I, respectively. The law dealing with regulation of banking is traceable to Entry 45 of List I and only the Parliament is competent to legislate. The Parliament has enacted the SARFAESI Act. It does not intend to regulate the incorporation, regulation, or winding up of a corporation, company, or co­operative bank/co­ operative society. It provides for recovery of dues to banks, including co­operative banks, which is an essential part of banking activity. The Act in no way trenches on the field reserved under Entry 32 of List II and is a piece of legislation traceable to Entry 45 of List I. (Para 69)

The co­operative banks, which are governed by the Banking Regulation 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. (Para 83)

Since the activity of a co­operative bank is banking regulated by the law enacted within the relatable Entry 45 of List I, we find 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 co­operative banks are doing banking business under Section 5(b) of the Banking Regulation Act, 1949, and the exclusion of the co­operative societies from Entry 43 of List I, does not have any bearing regarding the interpretation of Entry 45 of List I. (Para 84)

‘Banking’ relating to co­operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co­operative banks in the SARFAESI Act. It cannot be said to be over­inclusion on the anvil of the principles laid down by the Supreme Court. (Para 99)

The co­operative banks registered under the State legislation and multi­State level co­operative societies registered under the Multi­State Co­operative Societies Act, 2002 with respect to ‘banking’ are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India. (Para 102(1)(a))

The co­operative banks run by the co­operative societies registered under the State legislation with respect to the aspects of ‘incorporation, regulation and winding up’, in particular, with respect to the matters which are outside the purview of Entry 45 of List I of the Seventh Schedule of the Constitution of India, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution of India. (Para 102(1)(b))

Whether ‘banking company’ as defined in Section 5(c) of the Banking Regulation Act, 1949 covers co­operative banks registered under the State Co­operative Laws and also multi­State co­operative societies?

The third proviso to Article 243ZL(1) clarifies that in case of a co­ operative society carrying on the business of banking, the provisions of the Banking Regulation Act, 1949 shall also apply besides the State Act. The fourth proviso to clause (1) of Article 243ZL also contains an exception with respect to multi­State co­operative society carrying on the business of banking, the provisions of this clause shall have the effect as if for the words ‘six months’, had been substituted by words ‘one year.’ Thus, the constitutional provision itself makes a distinction between a co­ operative bank and other co­operative societies and applied law enacted under Entry 45 of List I of the Seventh Schedule. It set at rest any controversy concerning the applicability of the Banking Regulation Act, 1949 to banks run by co­operative societies. It also makes it clear that such banks are governed by Entry 45 of List I of the Seventh Schedule. (Para 62)

When we apply the provisions of the Act of 1949 to a co­operative bank, the definition of ‘banking company’ has to be read to include a co­operative bank. (Para 69)

Merely because the procedure for recovery of dues is provided in the Co­ operative Societies Act, could not have come in the way of interpretation of that expression ‘co­operative bank’ which was included in the definition and interpretation clause of Section 5 of the Banking Regulation Act, 1949. (Para 78)

The co­operative banks involved in the activities related to banking are covered within the meaning of ‘Banking Company’ defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of ‘banking’ of co­operative banks run by the co­operative societies. 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 Reserve Bank of India Act, 1934 relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India. (Para 102(2))

Whether co­operative banks both at the State level and multi­State level are ‘banks’ for applicability of the SARFAESI Act?

Even assuming for the time being that definition of ‘bank’ in Section 5(c) of the Banking Regulation Act, 1949 did not cover the co­operative banks; the expression ‘bank’ has been defined in the SARFAESI Act under Section 2(1)(c), and the provisions contained in Section 2(1)(c)(v) authorises the Central Government to specify ‘such other bank’ for that Act. Thus, the notification issued on 28.1.2003 notifying ‘co­ operative bank’ as the ‘bank’ is covered by Entry 45 of List I as they are regulated by the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934. (Para 85)

Co-­operative societies/banks stand included by incorporation in Section 5(1)(c) of the BR Act and the notification was issued ex abundanti cautela. By virtue of Section 56(a), co­operative banks, as defined in Section 56(cci) of the Banking Regulation Act, 1949, are included in Section 5(1)(c). Similarly, multi­State co­operative banks were also covered. (Para 85)

The co­operative banks under the State legislation and multi­State co­operative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, a legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable. (Para 102(3)(a))

Whether provisions of Section 2(c) (iva) 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?

Section 2(c)(iv)(a) of the SARFAESI Act and the notification dated 28.2.2003(By the notification issued in 2003, the co­operative bank was brought within the class of banks entitled to seek recourse to the provisions of the SARFAESI Act.) cannot be said to be ultra vires. They are within the ken of Entry 45 List I of the Seventh Schedule to the Constitution of India. (Para 59)

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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with respect to co­ operative banks. The provisions of Section 2(1)(c)(iva), of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, adding “ex abundanti cautela”, ‘a multi­State co­operative bank’ is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the co­ operative banks registered under the State legislation. (Para 102(3)(b))

Copy of judgement: Judgement_05-May-2020

-Adv. Tushar Kaushik

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