SARFESI ACTRecovery of Dues by Co-operative Banks

SUPREME COURT OF INDIA

Pandurang Ganpati Chougule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. 

2020 (3) CTC 558 | 05.05.2020

BACKGROUND 

The present case concerns the applicability of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “the SARFAESI Act”) to the co-operative banks. Pandurang Chougule (hereinafter referred to as “the Appellant”) questioned the action of Viswasrao Patil Murgud Sahakari Bank (hereinafter referred to as “the Respondent”) under the SARFAESI Act before the Civil Judge, which was dismissed on the ground of lack of jurisdiction.

A writ petition was also filed under Article 32 questioning the invocation of SARFAESI Act by issuing notices under Section 13 by the co-operative banks.

During the pendency of this matter, the Enforcement of Security Deposit and Debts Law (Amendment) Act, 2012 amended the definition of Section 2(1)(c) of SARFAESI Act to include “(iva) a multi-State co-operative bank” such that co-operative banks could recourse to the provisions of SARFAESI Act for recovery of dues, which has also been questioned in the writ petition.

Prior to that, co-operative banks could seek recourse to the provisions of SARFAESI Act through notification issued in 2003 which brought co-operative banks within the class of banks entitled to seek recourse to the SARFAESI Act.

In Narendra Kantilal Shah v. Join Registrar, Co-operative Societies AIR 2004 Bom 166, the High Court of Bombay held that ‘banking company’ includes co-operative bank within the meaning of Section 2(d) of the Recovery of Debts Act, 1993. Hence, the courts and authorities under Maharashtra Co-Operative Societies Act, 1960 would cease to have jurisdiction over applications submitted by co-operative banks for recovery of dues.

This decision was set aside by the Supreme Court in Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. (2007) 6 SCC 236, which held that Co-operative Banks established under Maharashtra Co-Operative Societies Act, 1960 and Andhra Pradesh Co-Operative Societies Act, 1964 do not fall within the meaning of ‘banking company’ under Section 5(c) of the Banking Regulations Act, 1949 and therefore the provisions of Recovery of Debts Act, 1993 do not apply for recovery of dues by co-operative banks.

In Administrator, Shri Dhakari Group Co-operative Cotton Seal and Ors. v. Union of India, (Special Civil Application No. 930 of 2001) the High Court of Gujarat relied upon Greater Bombay Coop. Bank Ltd. judgment and struck down the 2003 notification.

However, the High Court of Bombay in Khaja Industries v. State of Maharashtra 2007 (6) Mah LJ 712 and Rama Steel v Union of India (2007) 6 Mah LJ 387 dismissed the writs challenging the invocation of SARFAESI Act by co-operative banks and upheld the recourse to proceedings under SARFAESI Act by co-operative banks.

In Neel Oil Industries v. Union of India AIR 2015 Gujarat 171, the High Court of Gujarat rejected the challenge to the Constitutional validity of Clause (iva) ‘multi-State co-operative bank’ inserted by way of Amendment Act, 2013.

ISSUES BEFORE THE SUPREME COURT OF INDIA

The following issues were considered by the Supreme Court of India:

1. Whether ‘co-operative banks’, which are co-operative societies also, are governed by Entry 45 of List I or by Entry 32 of List II of the VII 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 co-operative banks registered under the State Co-operative Laws and also multi-State co-operative societies?

3. (i) Whether co-operative banks both at the State level and multi-State level are ‘banks’ for applicability of the SARFAESI Act?

(ii) Whether provisions of Section 2(c) (iva) of the SARFAESI Act on account of inclusion of multi-State co-operative banks and notification dated 28.1.2003 notifying cooperative banks in the State are ultra vires?

DISCUSSION AND FINDINGS

Regarding the first issue,

The Supreme Court opined that co-operative banks registered under State legislation and multi-State level co-operative societies registered under the Multi-State Co-operative Societies Act, 2002 with respect to ‘banking’ fall within the purview of Entry 45 of List I of the VII Schedule of Constitution of India.

The Court referred to the Statement of Objects and Reasons of the Banking Regulations Act, 1949 which states that deposits and working funds of co-operative banks are so large that the extension of provisions of Banking Companies Act, 1949 to these banks would be in the public interest. It further noted that the Reserve Bank of India Act was amended to extend its applicability to co-operative banks.

The Court relied on the judgment in Rustom Cavasjee Cooper v. Union of India (1970) 1 SCC 248, where it was held that the word ‘banking’ has never had any static meaning, and the only meaning will be the common understanding of men and the established practice about banking. Various forms of business come within the legitimate business of a bank.

The Court affirmed the opinion that the banking business can be carried out by a primary credit society being a co-operative bank, which holds license issued by the Reserve Bank of India and hence banking done by a co-operative bank is covered within the ambit of Entry 45 of List I. Banking has to be given full effect in pith and substance to include business of co-operative banks performing banking activities with valid license.

However, co-operative banks run by co-operative societies which are registered with the particular aspects of ‘incorporation, regulation and winding up’ under the State Legislation are to be governed by legislation under Entry 32 of List II of VII Schedule and do not fall within the ambit of Entry 45 of List I of VII Schedule.

Relying on the judgment in Union of India and Anr. v. Delhi High Court Bar Association and Ors (2002) 4 SCC 275, wherein it was held that recovery of dues is an essential function of banking institution. The Court held that amendment of SARFAESI Act to include co-operative banks within the definition of bank does not trench on the field reserved for State Legislation under Entry 32 List II as the recovery of dues to banks including co-operative banks is an essential banking function and the Parliament is competent to legislate upon the same.

Regarding the second issue,

The Court noted that the banking activities of co-operative banks run by co-operative societies are governed by the Banking Regulations Act, 1949. Banking activities of co-operative banks 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 Central legislation under Entry 45 of List I. Co-operative banks are required to comply with provisions of Banking Regulations Act, 1949 and other legislations under ‘Banking’ in Entry 45 of List I and the Reserve Bank of India Act for carrying out banking activities.

Further, the Court noted that since recovery is an essential function of banking including co-operative banking, the recovery procedure under Section 13 of SARFAESI Act shall be applicable to co-operative banks. Section 2(1)(c) of the SARFAESI Act recognises co-operative banks under State legislation and multi-State co-operative banks as ‘banks’ under the Act.

Considering the final issue,

The Court held that the 2003 notification and amendment to SARFAESI Act are not ultra vires the Constitution. It relied on the judgment in KC Gajapati Narayan Deo v. State of Orissa AIR 1953 SC 375, wherein it was held that the substance of the Act is material and not the form or outward appearance and if the subject matter in substance is beyond the powers of legislature, then it would be condemned as violation of the constitution.

Further, in State of Tamil Nadu and Ors. v. K. Shyam Sunder and Ors (2011) 8 SCC 737, it was observed that on deciding upon the concept of colourable legislation, the Court is concerned with the competence of the legislature to enact a particular law and that the Doctrine of Malafide does not involve question of bonafide or malafide on the part of legislature.

Therefore, the Court held that the SARFAESI Act qualified the test of legislative competence and hence does not become a colourable piece or over-inclusive or beyond the competence of parliament.

DECISION 

The Court held that the SARFAESI Act covers the banking activities undertaken by co-operative banks and that co-operative banks were entitled to seek recourse for recovery of dues under the Act.

Recover of dues is an essential banking function and the Parliament is empowered to enact a law under Entry 45 of List I concerning banking activities of co-operative banks. Further, it held that State   legislation   and multi-­State co­operative banks are ‘banks’ under section 2(1)(c) of the SARFAESI Act which can follow recovery procedure prescribed under Section 13 of the Act.

AMLEGALS REMARKS 

Through this judgment, the Supreme Court has upheld the view that co-operative banks come under the purview of SARFAESI Act for recovery of dues. The Court has established the position in law that although some functions of co-operative bank, including incorporation, regulation and winding up come under the purview of Entry 32 of State List under Schedule VII, the Central Government is empowered to legislate for co-operative societies undertaking banking and carrying out banking business, under Entry 45 of Union List.

The Court set aside the previous judgments which held that co-operative banks cannot invoke recovery procedure under SARFAESI Act and would have to seek recovery proceedings from the respective Co-operative States Act. This view does not hold good in law as co-operative societies engaged in banking business have to seek recovery, which is an essential aspect of banking. Therefore, the co-operative banks are entitled to seek recourse under the SARFAESI Act.

Therefore, co-operative societies undertaking core banking activities can seek recourse under the SARFAESI Act for recovery of dues from the borrower.

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