A blow to borrowers: Supreme Court’s nod to Co-operative Banks taking the SARFAESI route

The piece analyses the recent judgment in Pandurang Ganpati Chaugule v Vishwasrao Patil Murgud Sahakari Bank Limited.
Supreme Court
Supreme Court


A long standing issue regarding the status of co-operative banks vis-a-vis other banks in relation to applicability of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) has finally been settled by the Supreme Court in its latest judgment of Pandurang Ganpati Chaugule vs. Vishwasrao Patil Murgud Sahakari Bank Limited on 5th May 2020 (Pandurang Judgment).

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By way of background, the Central Government had issued a notification dated 28 January 2003[1] (Notification) extending the provisions of SARFAESI Act to co-operative banks. Due to several petitions being filed challenging the applicability of the Notification, the Parliament deemed it appropriate to amend the definition of ‘bank’ under the SARFAESI Act[2] by including a ‘multi state co-operative bank’ within such definition (Amendment).

Despite the Central Government as well as the Parliament extending the applicability of SARFAESI Act to co-operative banks, a plethora of writ petitions were filed challenging the constitutionality of the Amendment itself.

In an earlier judgment in Greater Bombay Co-op Bank Limited vs. United Yarn Textiles Private Limited (Greater Bombay Case), a three judge bench of the Supreme Court had conclusively restricted co-operative banks from approaching the Debts Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) for recovery of their dues.

In this case, the Court adopted the view that co-operative banks fall under Entry 32 of List II (State List) of the Seventh Schedule (Entry 32 of List II) of the Constitution of India, 1950 (Constitution) and therefore the Parliament is not competent to legislate with regard to co-operative banks under Entry 45 of List I (Union List) of Seventh Schedule (Entry 45 of List I). On the basis of this reasoning, the Court arrived at the conclusion that a co-operative bank cannot be considered as a ‘banking company’ under the Banking Regulation Act, 1949 (BR Act) and hence, the provisions of the RDB Act cannot be employed by such banks to recover their dues.


A constitution bench of the Supreme Court in the Pandurang Judgment has taken the opportunity to rectify the fallacy in the Greater Bombay Case. In this case, the Court was faced with a similar question i.e. ‘whether the provisions of SARFAESI Act would apply to co-operative banks’. While overruling the decision in the Greater Bombay Case, the Supreme Court upheld the inclusion of co-operative banks under the purview of SARFAESI Act.

Co-operative banks fall within the scope and ambit of ‘banking’ under Entry 45 of List I

The Supreme Court applied the ‘doctrine of pith and substance’ to observe that Entry 45 of List I, i.e. ‘banking’, is of the widest possible amplitude which takes within its purview even activities of co-operative banks including recovery of loans. On such reasoning, the Supreme Court held that the Amendment and the Notification can at best be termed as an ‘incidental encroachment’ on Entry 32 of List II, which is permissible in law.

The doctrine of pith and substance is applicable when legislative competence of the legislature with regard to a particular enactment is challenged in case of encroachment/trespass upon the domain of another. This doctrine provides that where the question arises of determining whether a particular law relates to a particular subject, the court shall look to the substance of the matter. Thus, if the substance falls within one list, then a mere ‘incidental encroachment’ by the law on another list does not make it invalid.

The Supreme Court placed reliance upon the constitutional bench judgment in Rustom Cavasjee Cooper vs. Union of India in which it held that 'banking' under Entry 45 of List I shall be given an expansive meaning, akin to a commercial activity, along with all miscellaneous services provided with the core business of banking.

Additionally, the Supreme Court also laid considerable emphasis on co-operative banks being regulated by central legislations such as the BR Act, which are enacted under Entry 45 of List I itself.

The Supreme Court, despite being cognizant of the fact that aspects of ‘incorporation’, ‘regulation’ and ‘winding up’ of co-operative societies are covered under Entry 32 of List II, took the view that Entry 45 of List I would apply to banking activities of such co-operative societies and even incidental encroachment upon Entry 32 of List II would be permissible as a) they carry out ‘banking’ activities to which Entry 45 of List I (in ‘pith and substance’) applies; and b) co-operative banks are registered and regulated under the BR Act which is a legislation enacted under Entry 45 of List I itself.

Does the term ‘banking company’ in Section 5(c) of the BR Act take co-operative banks within its fold?

In order to answer this question, the Supreme Court considered the effect of Section 56(a) of the BR Act, introduced by the Banking Laws (Application to Co-operative Societies) Act, 1965 (1965 Act) on the definition of ‘banking company’ as defined under Section 5(c) of the BR Act which states that ‘banking company’ means any company which transacts the business of ‘banking’.

The Supreme Court appreciated that co-operative banks are defined separately under Section 56(cci) of the BR Act rather than forming part of the definition of ‘banking company’ under Section 5(c). This, the Court opined, was intentionally done by the legislature to harmonize the applicability of the provisions of the BR Act to co-operative banks and to other banks and companies. Explaining further, the Court observed that though the definition of ‘banking company’ under the BR Act was not amended, however, by virtue of Section 56(a), a reference to a banking company shall be construed as a reference to a co-operative bank as well.

The reason for not specifically amending the definition of ‘banking company’ and for providing separate provisions specifically applicable to co-operative banks was necessary to retain certain provisions in the existing form (such as incorporation, regulation and winding up) as they applied to other banks and companies and not to co-operative banks. Hence, the Supreme Court applied the principle of ‘incorporation by reference’ to hold that Section 56(a) becomes a part of Section 5(c) and thus, the definition of ‘banking company’ has to be read to include a co-operative bank.

Therefore, the Court opined that as the definition of ‘banking company’ under the BR Act includes co-operative banks, the provisions of the SARFAESI Act are to automatically apply to co-operative banks as the SARFAESI Act inherits the definition of ‘banking company’ from the BR Act itself. In other words, co-operative banks shall be considered as ‘banks’ for the purposes of applicability of the SARFAESI Act.

Constitutional Validity of the Amendment and the Notification

Summarizing the above discussion, the Supreme Court observed that the Central Government and the Parliament were competent to issue the Notification and enact the Amendment, respectively, as banking activities of co-operative banks fall within the scope of Entry 45 of List I, and only ‘incidentally encroach’ upon Entry 32 of List II, which is permissible under law.

Hence, it is well within the powers of the Parliament under Entry 45 of List I to provide for additional measures for recovery of dues by co-operative banks under the SARFAESI Act and thus, the Notification and the Amendment are not ultra vires the Constitution.


By upholding the applicability of the SARFAESI Act to co-operative banks, the Supreme Court has cleared a long standing controversy which would resolve the ambiguity surrounding the same. More importantly, the Pandurang Judgment clears the hurdles which were created by earlier conflicting judgments on this subject, to pave the way for co-operative banks to expeditiously recover their dues from defaulting borrowers without the intervention of courts.

On the other hand, the Pandurang Judgment seems to allow ‘incidental encroachment’ on State legislations by Central legislations, which may result in courts taking a biased approach when faced with questions pertaining to an overlap between a Central Act and a State Act, which may be unfairly tilted in favour of Central legislations.

A natural corollary of the Pandurang Judgment would also be that, a co-operative bank would also be able to approach the Debts Recovery Tribunal under the RDB Act to recover its dues. However, this may result in an unwanted overlap of remedies under the RDB Act on one hand and various state legislations and Multi-State Co-operative Societies Act on the other.

Padmaja Kaul, Yugank Goel and Aman Chaudhary are part of the Litigation and Dispute Resolution at IndusLaw.

[1] Notification no. 105(E)

[2] Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012

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