Whether the Co-operative Banks come within the Ambit of SARFAESI Act?
The Supreme Court in the case of Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited has finally adjudicated a continuing issue with regards to the applicability of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereafter referred as SARFAESI Act) to Co-operative Banks.
Table of Contents:
- Background of the Case
- Facts of the Case
- Contentions of the Appellant
- Contentions of Counsel of Reserve Bank of India
- Judgement
- Conclusion
Background of the Case
Before the enactment of the SARFAESI Act, on account of non-payment of principal or interest amount by borrowers, the financial institutions had to approach Court. Such a process of recovery required a lot of time and became lengthy.
This is when SARFAESI Act was enacted. The said Act facilitated the financial institutions to recover their dues fast. These institutions and banks were empowered under the Act to recover their dues from borrowers by auctioning the properties pledged by the borrower with them. Thus, the recovery process here became easy.
Section2(1)(c)(v) of the SARFAESI Act states that a bank means such bank which the Central Government may specify through a notification. This gives the power to the Central Government to bring any financial institution within the ambit of the bank in this Act.
So, the Central Government in the year 2003 came up with a notification which stated that all the co-operative banks which are operating in the country will come under the definition of bank for the purpose of the SARFAESI Act. This brings co-operative banks within the scope of a bank for the purpose of the SARFAESI Act.
Further, when the SARFAESI Act was enacted in the year 2002, the term ‘Co-operative banks’ was not included in the definition of ‘Bank’ under Section 2(1)(c). The said section states that a Bank means a banking company, a corresponding new bank, the State Bank of India etc.
It was by way of an amendment in 2013, that a new sub-clause (iva) was inserted in section 2(1)(c) which added the term ‘multi-State co-operative bank’ in the SARFAESI Act.
Facts of the Case
The above-stated amendment by the Parliament brought the Co-operative banks under the purview of the SARFAESI Act. The amendment thus faced criticism and was also challenged by filing various petitions against it in the Court.
The same issue was raised in various cases earlier before the court. In the case of Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. and Others, the Apex Court observed that the Co-operative banks fall under Entry 32 of List II (State List) of the Constitution of India. Thus, as the co-operative bank is a matter of State List, the Parliament cannot legislate over it under Entry 45 (Banking) of List I (Union List). The Court further stated that it is for this reason that a co-operative bank will not come under the ambit of ‘banking company’.
It is also an issue in the case that whether the term “banking” provided by Entry 45 List I should be interpreted in a line of the expression “banking” provided under section 5(b) of the Banking Regulation Act, 1949 (hereafter referred as BR Act).
By relying upon the judgement given by the Court in the case of Greater Bombay Coop. Bank, the Gujarat High Court struck down the notification of 2003 in the case of Shri Dhakari Group Cooperative Cotton Seal & Ors. v. Union of India.
In the case of Pandurang Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited, Mr. Pandurang was unable to repay the principal loan amount and interest on it that he borrowed from the said cooperative bank. As a result, the co-operative bank under the provisions of the SARFAESI Act initiated the process against him.
On August 13, 2008, appellant Mr. Pandurang questioned the action of the cooperative bank before the Civil Judge. By deciding the primary issue, the Trial Court held that it did not have the jurisdiction to decide the suit. The first appeal preferred was dismissed. An appeal against it is thus preferred before this Court. A separate writ petition under Article 32 of the Constitution of India has also been filed, questioning the invocation of the SARFAESI Act by issuing notices under Section 13 by cooperative banks.
During the pendency of the matters, the Central Government brought into force the Enforcement of Security Deposit and Debts Law (Amendment) Act, 2012 (Act 1 of 2013), amending the definition of Section 2(1)(c) of the SARFAESI Act. The said amendment brought “multi-state co-operative bank” in the definition of the bank provided under Section (2)(1)(c) of the SARFAESI Act, thus this amendment has also been questioned in the writ petition filed in this Court.
Mr. Pandurang contended against it that a co-operative bank cannot initiate proceedings against him under the SARFAESI Act, as the said Act does not apply to co-operative banks.
Issues:
- Whether the provisions of the SARFAESI Act apply to co-operative banks?
- Whether the Amendment and 2003 Notification issued by Central Government are constitutionally valid?
- Whether co-operative banks fall within the scope of ‘banking’ under Entry 45 of List I?
- Whether cooperative banks involved in the activities related to banking were covered within the meaning of Banking company under BR Act, 1949 or not?
Contentions of the Appellant
- The learned counsel of the appellant raised a contention that the ambit of “banking” under Entry 45 List I should be construed in line with the expression “banking” provided in Section 5(b) of the BR Act, 1949. He referred the case of Rustom Cooper v. Union of India in which the Court held that “banking” under Entry 45 does not include ‘banker’ or ‘bank’. Banking is an activity. Thus, the Entry of banking under the List refers to only the activity of banking.
- With regards to the scope of Entry 45 List I, he referred to the decision of ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and others, wherein it was emphasized that even if a company does different businesses in addition to clause (a) to (o) of Section 6 (1), it remains a banking company as long as it performs the core banking functions under Section 5(b) of BR Act. Performance of core banking functions is necessary for being regulated under BR Act. Thus, “banking” in Entry 45 List I is to be only confined to the “core banking business”.
- He further contended that Entry 43 of List I of the Seventh Schedule of the Constitution of India gives the Parliament with the power to pass a law about the ‘incorporation, regulation and winding up’ of a trading corporation and more particularly a banking corporation. However, ‘cooperative societies’ are expressly excluded from the purview of the Parliament’s competence as it is a State subject under Entry 32 of List II and the legislative history of the Banking Regulation Act, 1949 has made a difference between an ‘entity’ and ‘activity.’
Thus, as a Co-operative society is a matter of State List, the Parliament cannot legislate over it under Entry 45 of List I.
iv. The counsel by referring to the Statement of Objects and Reasons stated that the BR Act, 1949 only regulates the banking business relatable to Entry 54 and not to regulate the co-operative societies.
v. The Parliament is incompetent to regulate any other business, function or facets of a co-operative society. The co-operative societies cannot be regulated and treated as a company performing banking functions by the Parliament.
vi. The object of the SARFAESI Act is to regulate securitization and reconstruction of financial assets and enforcement of security interests. The business of securitization is not a banking business. Thus, regulating the assets of a co-operative bank by bringing them under the ambit of the SARFAESI Act is contradictory to the original intent of the extending provisions of the BR Act, 1949. This will amount to exercising control over the entities which are beyond the scope of the Parliament’s competence.
vii. He further contended that the Central Government’s Notification of 2003 is ultra vires as the Parliament includes only banking companies and banking corporations within its purview. Section 2(1)(c)(v) of the SARFAESI Act confers the Central Government with the power to specify any other bank for the purposes of this Act. But they should be between clauses (i) to (iv) and not beyond it. As the co-operative bank is neither a banking company nor it is a banking corporation thus it is outside the ambit of Section 2(1)(c)(v) of the SARFAESI Act.
viii. It is a colourable exercise as the 2003 Notification is ultra-vires to the decision given in C. Gajapati Deo and others v. State of Orissa and State of Tamil Nadu v. Shyam Sunder. If Entry 43 is itself excluding something, then it cannot be controlled by the Union of India indirectly.
ix. The counsel for the petitioner further contended that Parliament is not competent to enact laws concerning co-operative societies or banks and for a co-operative society, banking is merely an incidental or ancillary business. A co-operative society doing business will remain a co-operative society and is covered under Entry 32 of List II.
Contentions of Counsel of Reserve Bank of India
- He contended that as the matter is covered under List I of the Seventh Schedule of the Constitution of India, the Parliament has the right to legislate in respect of banking business as defined in section 5(b) of the BR Act.
- One of the essential functions of a banking institution is to recover the dues. Entry 45 of List I would mean legislation regarding all aspects of banking, including ancillary or subsidiary matters relating to that. The SARFAESI Act falls within the scope of Entry 45 List I.
- Parliament has the power to enact a law in respect to matters contained in Entry 45 List I, even if the bank is a co-operative society. No difference is made by Entry 45 of List I, whether the entity carrying the banking business is a company or a statutory corporation or a co-operative society.
Thus, Parliament has the power to legislate on the matters concerning matters referred to in the SARFAESI Act.
iv. Entry 45 of List I mean legislation regarding all the aspects of banking including ancillary or subsidiary. Thus, the SARFAESI Act falls within the ambit of Entry 45 of List I.
v. The statement of Objects and Reasons of the SARFAESI Act indicates that it relates to banking business and the matters incidental to it.
vi. The argument of the appellant that ‘such other banks’ do not include co-operative banks is without any basis and incorrect. The Parliament has the power to legislate.
Judgement
Coram: Justice Arun Mishra, Justice Ms. Banerjee, Justice Vineet Saran, Justice M.R. Shah, Justice Aniruddha Bose
The Supreme Court took the opportunity to rectify the fallacy in the case of Greater Bombay. The Court by overruling the decision of the Greater Bombay case and held that co-operative banks come under the purview of the SARFAESI Act and the said Act applies to them.
While discussing the constitutional validity of the Amendment and 2003 Notification the Court held that the Parliament and the Central Government are competent under the scope of Entry 45 of List I to provide additional measures for recovery of dues by a co-operative society.
With regards to the third issue, the Court applied the ‘doctrine of pith and substance’. The Court observed that Entry 45 of List I (banking) is a much wider term and will take within itself many activities including activities performed by the co-operative banks and recovery of the loan. Though co-operative society is a subject matter of the State List, but an incidental encroachment by one law on another list will not make it invalid.
With regards to the fourth issue, the Apex Court held that cooperative banks involved in the activities related to banking and were covered within the meaning of ‘Banking Company’ defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949. Just because the co-operative bank lends money to limited members, they will not go out of the ambit of ‘banking’, and all the other functions like a commercial bank are also performed by them.
Conclusion
By bringing the co-operative banks with the ambit of the SARFAESI Act, the Court has settled a long-lived controversy. Applicability of SARFAESI Act on co-operative banks will be beneficial for the co-operative banks as it can now expeditiously sell the borrowers collateral to recover its money. Besides this, as a co-operative bank will come under the purview of the SARFAESI Act, the process of liquidation or resolution will also be quick.