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SARFAESI Act applicable to Co­operative Banks

In PANDURANG GANPATI CHAUGULE vs VISHWASRAO PATIL MURGUD SAHAKARI BANK LIMITED,  reference was made to the 5-judge bench of the Supreme Court in view of conflicting decisions in Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd., (2007) 6 SCC 236, Delhi Cloth & General Mills Co. Ltd. v. Union of India, (1983) 4 SCC 166, T. Velayudhan Achari v. Union of India, (1993) 2 SCC 582 and Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275.

The Supreme Court held that in our opinion, 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. 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.

In a 159-pages long verdict, the 5-judge concluded,

1) The co­operative banks registered under the State legislation and multi­State level co­operative societies registered under the Multi­State Co­operative 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.

2) 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.

3) 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.

4) 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.

5) 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 cooperative 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 cooperative banks registered under the State legislation.

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