Summary of Supreme Court judgment on applicability of SARFAESI Act to Co-operative Banks in Pandurang Ganpati Chaugule Vs. Vishwasrao Patil Murgud Sahakari Bank Limited-SC

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I. Case Reference

Case Citation : [2020] ibclaw.in 09 SC
Case Name : Pandurang Ganpati Chaugule Vs. Vishwasrao Patil Murgud Sahakari Bank Limited
Petitioner(s) : Pandurang Ganpati Chaugule
Respondent(s) : Vishwasrao Patil Murgud Sahakari Bank Limited
Appeal No. : Appeal No. Civil Appeal No. 5674 Of 2009
Date of Judgment : 05-May-20
Court : Supreme Court of India
Act : SARFAESI Act 2002
Justice : Justice Arun Mishra
Justice : Justice Indira Banerjee
Justice : Justice Vineet Saran
Justice : Justice M.R. Shah
Justice : Justice Aniruddha Bose

II. Full text of the judgment

Full text of the judgment available here.

III. Brief about the decision 

A. Summary of the judgment:

In this judgment, following four questions have been answered by the 5-judge bench of Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, JJ:

I. 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 Seventh Schedule of the Constitution of India, and to what extent?

  • Decision with respect to banking, licensing, accounts, etc.: The co­operative banks registered under the State legislation and multi­State level co­operative societies registered under  the Multi-State Co-operative Societies Act, 2002 (MSCS 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.
  • Decision with respect to incorporation, regulation and winding up: 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.

II. 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?

Decision: 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 RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.

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

Decision: 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.

IV. 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?

Decision: 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 SARFAESI 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.

 

B. Details analysis of the judgment:

I. Some Legal Contents referred in the case:

1. Entries 43, 44 and 45 of List I of the Seventh Schedule of the Constitution of India:

“43. Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including co­ operative societies.

44. Incorporation, regulation and winding up of corporations, whether trading or not, with objects not confined to one State, but not including universities.

45. Banking.”

 2. Entry 32 of List II of the Seventh Schedule of the Constitution of India:

“32. Incorporation, regulation and winding up of corporation, other than those specified in List I, and universities; unincorporated trading, literary, scientific, religious and other societies and associations; co­operative societies.”

 3. Banking and Banking Company-Section 5(b) & (c) of the BR Act, 1949:

5. Interpretation.— In this Act, unless there is anything repugnant in the subject or context,—

(b) “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise;”

(c) “banking company” means any company which transacts the business of banking in India;

Explanation.— Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;”

4. Clause (c) & (d) of Section 2 of SARFAESI Act, 2002:

2. Definitions.—(1) In this Act, unless the context otherwise requires,—

(c) “bank” means—

(i) a banking company; or

(ii) a corresponding new bank; or

(iii) the State Bank of India; or

(iv) a subsidiary bank; or

(iva) a multi­State co­operative bank; or

(v)  such other bank which the Central Government may, by notification, specify for the purposes of this Act;

 ——-

(d) “banking company” shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);”

5. Notification No. S.O. 105 dated 28.01.2003 issued by the Ministry of Finance and Company Affairs under  Section 2(1)(c)(v) of the SARFAESI Act:

S.O.105 (E).— In exercise of the powers conferred under item (v) of clause (c) of Sub­ section (1) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), the Central Government hereby specifies “Co­operative Bank” as defined in clause (cci) of Section 5 of the Banking Regulation Act 1949 (10 of 1949) as ‘bank’ for the purpose of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).”

II. Earlier conflicting decisions

  • Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. and Ors.1
  • Delhi Cloth & General Mills Co. Ltd. v. Union of India and Ors.2
  • T. Velayudhan Achari and Anr. v. Union of India and Ors.3 and
  • Union of India and Anr. v. Delhi High Court Bar Association and Ors.4

III. History of the Co-operative banks under SARFAESI

  1. Section 56(c)(i)(cci) is contained in Part V of the BR Act, 1949, and was brought into force on 1.3.1966. It defines ‘co­operative bank’ to mean a ‘state co­operative bank,’ a ‘central co­operative bank,’ and a ‘primary co­operative bank.’ 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. Section 2(1)(c) (iva) was inserted into the SARFAESI Act, w.e.f. 15.1.2013. Before that, the co­operative bank and the multi­State co­operative bank took recourse to the SARFAESI Act under the notification issued in 2003.
  2. Writ petitions were filed questioning vires of the notification dated 28.1.2003 issued under Section 2(1)(c)(v) of the SARFAESI Act and the insertion of Section 2(1)(c)(iva) to the SARFAESI Act in 2013. The backdrop history of litigation indicates that in Narendra Kantilal Shah v. Joint Registrar, Co­operative Societies5 , a Full Bench of the Bombay High Court opined that term ‘banking company’ also means co­operative bank within the meaning of Section 2(d) of the RDB Act, 1993. Hence, with effect from the date of constitution of Debts Recovery Tribunal under RDB Act, 1993, the courts and authorities under the Maharashtra Co­operative Societies Act, 1960, as also the MSCS Act would cease to have jurisdiction to entertain the applications submitted by the co­operative banks for recovery of their dues. The decision in Narendra Kantilal Shah (supra) was set aside by this Court in Greater Bombay Coop. Bank Ltd. (supra). This Court opined that the co­operative banks established under the Maharashtra Co­operative Societies Act, 1960 and Andhra Pradesh Co­operative Societies Act, 1964, transacting the business of banking do not fall within the meaning of ‘banking company’ as defined in Section 5(c) of the BR Act, 1949. Therefore, the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, now renamed as The Recovery of Debts and Bankruptcy Act, 1993 (for short, ‘the RDB Act, 1993’), by invoking the doctrine of incorporation do not apply to the recovery of dues by co­operative banks from their members. The field of co­operative societies cannot be said to have been covered by the Central legislation by reference to Entry 45 of List I of the Seventh 5 AIR 2004 Bom 166 Schedule of the Constitution of India. Co­operative banks constituted under the Co­operative Societies Acts enacted by the respective States would be covered by ‘co­operative societies’ by Entry 32 of List II of the Seventh Schedule of the Constitution of India. In the year 2004, the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004, was passed by the Union of India, amending various provisions contained in the BR Act, 1949 retrospectively, w.e.f. 1.3.1966. On the same anvil, the question posed is whether provisions can be applied to recovery provisions carved out in the SARFAESI Act.
  3. Writ Petition No.2672 of 2007 was filed by Khaja Industries, challenging the invocation of the SARFAESI Act by Jalgaon Peoples Co­operative Bank. The Bombay High Court dismissed the same. The recourse to the proceedings under the SARFAESI Act was upheld. In Rama Steel v. Union of India (2007) 6 Mah. L.J. 387 , the decision in Khaja Industries was followed. Against the decision of Bombay High Court, appeals have been filed.
  4. On 13.8.2008, Pandurang Ganpati Chougule – appellant, questioned the action of Vishwasrao Patil Murgud Sahakari Bank Limited under the SARFAESI Act before the Civil Judge in Spl. Civil Suit No.226 of 2007. Deciding the preliminary issue, the Trial Court held that it did not have the jurisdiction to decide the suit. The first appeal preferred was dismissed. Against that, the appeal has beenpreferred 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 amendment has also been questioned in the writ petition filed in this Court.
  5. In Administrator, Shri Dhakari Group Co­operative Cotton Seal & Ors. v. Union of India, (Special Civil Application No.930 of 2001), the Gujarat High Court struck down the notification dated 28.1.2003, relying upon Greater Bombay Coop. Bank Ltd. (supra), same has also been questioned in the appeal. Later on, Gujarat High Court in Neel Oil Industries v. Union of India AIR 2015 Gujarat 171, rejected the challenge to the Constitutional validity of clause (iva) ‘multi­State co­operative bank’ inserted by way of Amendment Act, 2013.

 IV. Brief facts of the case

In exercise of power conferred under Section 2(1)(c)(v) of the SARFAESI Act, a notification no. S.O. 105) was issued by the Ministry of Finance and Company Affairs on 28.1.2003 specifying co­operative banks as defined in clause (cci) of Section 5 of the BR Act, 1949 for the purpose of the SARFAESI Act. In Section 2(1)(c) of the SARFAESI Act, further amendments have been made by incorporating a ‘multi­State co­operative bank,’ w.e.f. 15.1.2013 by way of Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 (No.1 of 2013). Other provisions of the SARFAESI Act were also amended. A similar amendment was made to the RDB Act, 1993, in Section 2(d) by inserting clause (vi) ‘a multi­State co­operative bank.

The matters have been referred in view of conflicting decisions as referred above.  Question before the Supreme Court relates to the scope of the legislative field covered by Entry 45 of List I viz. ‘Banking’ and Entry 32 of List II of the Seventh Schedule of the Constitution of India, consequentially power of the Parliament to legislate.  The moot question is the applicability of the  SARFAESI Act to the co­operative banks.

V. The Supreme Court’s verdict

Question-I: 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?

a. Meaning of ‘Banking’

  • The main issue is as to the meaning of ‘banking’ used in Entry 45 of List I of the Seventh Schedule of the Constitution of India. It is necessary to understand the meaning of ‘bank’ and ‘banking.’ Before the Constitution was promulgated, banking was dealt with by the erstwhile Banking Companies Act, 1949. Upon its extension to co­ operative banks run by co­operative societies, it was renamed as the BR Act, 1949. Before we consider the definition of ‘banking’ under the BR Act, 1949, it is necessary to understand the meaning of ‘bank’ and ‘banking.’ The bank ordinarily means any establishment which carries the business of banking.
  • Banks can be of different kinds such as Co­operative Bank, Collecting Bank, Commercial Bank, Correspondent Bank, Custodian Bank, Depository Bank, Drawee Bank, Federal Home Loan Bank, Federal Land Bank, Intermediary Bank, Investment Bank, Mutual Savings Bank, Nationalised Banks, Negotiable Bank, Non­Member Bank, Payor Bank, Savings and Loan Bank, Saving Bank.
  • The expression ‘bank’ has been defined in various enactments relating to it. The ‘Reserve Bank’ has been defined in Section 5(l) to mean Reserve Bank of India constituted under Section 3 of the Reserve Bank of India Act, 1934 (2 of 1934). Section 5(ha) defines the ‘National Bank’ to mean the National Bank for Agriculture and Rural Development established under Section 3 of the National Bank for Agriculture and Rural Development Act, 1981. The ‘State Bank of India’ is defined in Section 5(nc) to mean the State Bank of India constituted under Section 3 of the State Bank of India Act, 1955 (23 of 1955).
  • The term ‘banking’ used in Entry 45 List I, came up for consideration in Rustom Cavasjee Cooper6, in which 11­Judge Bench of the Hon’ble Supreme Court. The submission raised by the petitioner that banking business meant only the hardcore of banking, was not accepted. 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 held that we are unable to accept the submission that banking under Entry 45 of List I does not cover ‘co­operative banks’. The activity of the co­operative bank is covered under Section 5(1)(b). A similar submission was not accepted in Rustom Cavasjee Cooper (supra). 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.

b. Difference between entity and activity

On a plain reading of Section 6(1) of the BR Act, 1949, it becomes evident that there is a distinction between the business of banking and entity that performs the banking functions. Section 6(1) and 6(2) enable only an entity to perform certain additional business functions. It does not confer any such status upon such an entity. The court held that In our opinion, Section 6 deals with the forms of business in which banking companies may engage. There cannot be any form of activity/business of banking without there being an entity. Section 6 is not a provision of the conferral of the status of the banking company. 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.

c. Co­operative bank is covered within the ambit of Entry 45 of List I:

The decision in Rustom Cavasjee Cooper (supra) vividly leaves no room for doubt that banking done by the co­operative bank is covered within the ambit of Entry 45 of List I. The decision in Gannon Dunkerley & Co., (Madras) Ltd. 7 stands neutralised by introduction of Article 366(29A) of the Constitution of India and the meaning of the said term has been redefined. Entries have to be given full effect in pith and substance considering forms of business of co­ operative banks performing the activities of banking under a licence. The same is covered within the purview of Entry 45 of List.

d. Effect of Entries 43 and 45 of List I and Entry 32 of List II of the Seventh Schedule of the Constitution of India:

Entry 43 of List I of the Seventh Schedule of the Constitution of India has been pressed into service on behalf of appellants. It confers upon the Parliament the competence to pass the law pertaining to ‘incorporation, regulation and winding up’ of the trading corporation, more particularly, a banking corporation. However, co­operative societies are expressly excluded from the purview of the Parliament’s competence. No doubt about it that in Entry 43 of List I ‘incorporation, regulation and winding up’ of the co­operative societies have been kept out of the purview of the Union List by specifically excluding the co­operative societies, otherwise, they would have been included for ‘incorporation, regulation and winding up’ in Entry 43 of List I. The terms “incorporation, regulation and winding up of co­ operative societies” were reserved as State subjects under Entry 32 of List II, it was so omitted from List 43 of List I. But the exclusion from Entry 43 of List I taking out ‘incorporation, regulation and winding up’ of co­operative societies out of the purview of the Parliament, does not advance the cause of the co­operative banks.

e. Competence of Parliament to enact RDDBFI Act, 1993:

In Delhi High Court Bar Association (supra), this Court in the context of the RDB Act, 1993 held that Parliament has the legislative competence to enact the Act. ‘Banking’ in Entry 45 of List I would comprehend legislation in respect of matters ancillary or subsidiary to it. The Parliament can enact a law regarding the conduct of the banking business, which includes recovery of banks’ dues, and for that purpose, set up the adjudicatory body like the Banking Tribunal is permissible. Thus, the establishment of Debts Recovery Tribunal under the RDB Act, 1993, was upheld.

 f. Incorporation, regulation and winding up of the co­operative societies under Entry 32 of List II  and banking, licensing, accounts, etc. can be covered under Entry 45 List I:

Hon’ble Supreme Court held that we are of the opinion that 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 BR Act, 1949, and the RBI Act under Entry 38 of List I.

It is apparent that ‘incorporation, regulation and winding up’ of the co­operative societies are covered under Entry 32 of List II of the Seventh Schedule of the Constitution of India, whereas ‘banking’ is covered by Entry 45 of List I. Thus, aspect of ‘incorporation, regulation and winding up’ would be covered under Entry 32 of List II. However, banking activity of such co­operative societies/banks shall be governed by Entry 45 of List I. The said banks are governed and regulated by legislation related to Entry 45 of List I, the BR Act, 1949 as well as the Reserve Bank of India Act under Entry 38 of List I. In the matter of licencing and doing business, a deep and pervasive control is carved out under the provisions of the BR Act, 1949 and banking activity done by any entity, primary credit societies, is a bank and is required to submit the accounts to the Reserve Bank of India, and there is complete control under the aforesaid Act. For activity of banking, these banks are governed by the legislation under Entry 45 of List I. Thus, recovery being an essential part of the banking, no conflict has been created by providing additional procedures under Section 13 of the SARFAESI Act. It is open to the bank to adopt a procedure which it may so choose. When banking in pith and substance is covered under Entry 45 of List I, even incidental trenching upon the field reserved for State under Entry 32 List II is permissible.

There can be various aspects of an activity. The co­operative societies may be formed under the provisions of the State Co­operative Acts. The State law provides for ‘incorporation, regulation and winding up’ under Entry 32 of List II, a membership registration, and other matters can be governed by Entry 32 of List II, and, at the same time, the aspects relating to the banking, licensing, accounts, etc. can be covered under Entry 45 List I.

The co­-operative 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.

g. Decision of the Apex Court:

Hon’ble Supreme Court held that the co­operative banks registered under the State legislation and multi­State level co­operative societies registered under the MSCS 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.

Further, the Court held that 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.

 

Question-II: 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?

It is apparent that in order to avoid verbatim reproduction of the earlier provisions, which did not apply to a co­operative bank, a device was carved out in Section 56(a) to read ‘company’ as ‘banking company’ or ‘the company’ or ‘such company’ as references to a co­ operative bank. If the definition in Section 5(c) and interpretation clause are not read as incorporated and having been amended, the interpretation clause and the entire amendment of Part V will become unworkable. It was not practical to amend the entire Act of 1949 as it dealt with ‘incorporation, regulation and winding up’ of other entities relatable to List I, as such the provisions were required to be retained, and such matters concerning co­operative societies/banks, relatable subject­matter under Entry 32 of List I of the Seventh Schedule of the Constitution of India, were to be excluded. As various provisions were to be omitted in their application to the co­operative societies and other provisions were to apply in a modified form, the amendments were made in the provisions in their application to the co­operative banks by providing a separate Chapter. Thus, it was not considered necessary nor would have been appropriate to amend the definition of Section 5(c) where it existed, in fact it was so amended in Section 56(a). Entire Chapter V was enacted concerning the application of the Act to the co­operative banks and has to be given full effect. 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 BR Act, 1949. It was open to the Parliament to deal with the subject of ‘banking’ in Entry 45 of List I and this Court in Greater Bombay Coop. Bank Ltd. (supra) itself opined that the BR Act, 1949 applies to co­operative banks which is the enactment related to Entry 45 of List I and third proviso to Article 243­ZL(1) of the Constitution of India also provides that the BR Act shall also apply.

Thus, the Parliament considered it appropriate to provide additional remedy for speedy recovery which is an alternative even if there is an incidental encroachment on the field reserved for the State under Entry 32 of List II, as in pith and substance, the ‘banking’ is part of Entry 45 of List I and recovery procedure is covered within the ken of Entry 45 of List I. Thus, considering the Doctrine of Pith and Substance and incorporation by amendment made, we are of the considered opinion that co­operative banks are included in the definition of ‘bank’ and ‘banking company’ under Section 2(1)(c) and 2(1)(d) of the SARFAESI Act.

Decision of the Apex Court:

The Supreme Court held that 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 RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.

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

Question-IV: 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?

Learned Counsel appearing on behalf of appellants argued that securitisation is not a banking business. The SARFAESI Act is to regulate securitisation and reconstruction of financial assets. Emphasis was laid on the financial assets and financial assistance. The definition of ‘debt’ in Section 2(1)(ha) of the SARFAESI Act is the same as defined in Section 2(g) of the RDB Act, 1993, the ‘debt’ is defined as any liability which is claimed as due during any business activity undertaken by the bank or the financial institution. In our opinion, the submission ignores and overlooks the purpose of the SARFAESI Act, i.e., enforcement of security interest, and that is precisely sought to be achieved by Section 13 without the intervention of the court. 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 BR 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.

Even assuming for the time being that definition of ‘bank’ in Section 5(c) of the BR 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 BR Act, 1949, and the RBI Act. For the ‘banking’ activity under Entry 45 of List I, the Parliament had the power to enact such a provision defining ‘bank’ to authorise and prescribe the recovery procedure for such a bank as provided in Section 13 of the SARFAESI Act; However, we are of the view that co­operative 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 BR Act, 1949, are included in Section 5(1)(c). Similarly, multi­State co­operative banks were also covered.

The earlier procedure for recovery of dues was differently provided for general banks and the co­operative banks through the Civil Court or Tribunal. In the SARFAESI Act, a procedure has been prescribed under Section 13 without the intervention of the court/tribunal to keep pace with the time. Thus, the malady of inordinate delay with which the order of civil court suffered as well as of the co­operative tribunals or summary procedure under the Co­ operative Societies Act, was sought to be redressed. Apart from that, it is permissible for the Parliament to enact the law to provide recovery procedures for bank dues that have been done by providing speedy recovery of secured interest without intervention of the court/tribunal.

The Court held that we find that ‘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 this Court.

Learned Counsel on behalf of appellants argued that notification dated 28.1.2003 is ultra vires and beyond the purview of the parent statute, i.e., the SARFAESI Act. The amendment is colourable legislation, and it encroaches upon a field outside its scope and is also an indirect method of achieving the result of bringing ‘co­operative banks’ within the purview of the SARFAESI Act and RDB Act, 1993 and is an attempt to regulate entities expressly excluded by Entry 43 of List I.

Further, the court held that we find that the SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be colourable piece or over­inclusive or beyond the competence of the Parliament.

Decision of the Apex Court:

Hon’ble Supreme Court answered the question-III that 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.

On question-IV, the Court held that 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.

References

1 2007) 6 SCC 236
2 1983) 4 SCC 166
3 1993) 2 SCC 582
4 2002) 4 SCC 275
5 AIR 2004 Bom 166
6 1970) 1 SCC 248
7 AIR 1958 SC 560

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