Cooperative Bank Judgment
Cooperative Bank Judgment

SARFAESI Act applicable to Cooperative Banks: Constitution Bench of Supreme Court rules

Debayan Roy

A five judge Constitution Bench of the Supreme Court today held that co­operative banks come under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act 2002 (SARFAESI Act) [Pandurang Ganpatii Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited].

The judgment was delivered by a Constitution Bench of Justices Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose.

The Bench held that co-operative banks are "banks" for the purposes of Section 2(1)(c) of the SARFAESI Act, and that the recovery procedure u/s 13 of the Act is also applicable to such banks.

The judgment also states that co-operative banks registered under state-specific acts and multi­-state level co­operative societies registered under the Multi­ State Co­operative Societies Act, 2002 concerning 'banking' are governed by the legislation relatable to Entry 45 of List I of the 7th Schedule.

The argument that the 2013 amendment to the SARFAESI Act adding mutli-state co-operative banks to Section 2(1)(c)(iva) was a "colourable exercise of power" was dismissed by the Bench

The five-judge Bench has also unanimously held that co-operative banks involved in banking activities are covered u/s 5(c) & 56(a) of the Banking Regulation Act, 1949 which is a legislation relatable to Entry 45 of List I.

Thus the Court has held that co-operative banks cannot carry on any activity without compliance of provisions of the 1949 Act and any other legislation applicable to such banks and the RBI Act.

The Court in effect also upheld the 2003 notification issued under the Banking Regulation Act, by which co­-operative banks were brought within the class of banks entitled to seek recourse to the provisions of the SARFAESI Act.

The verdict delivered through Justice Mishra has also held that Parliament had the legislative competence to bring cooperative banks under the ambit of SARFAESI Act.

In 1965, the Banking and Regulation Act was made applicable to co-operative banks. Thus began the regime of dual control, as co-operative banks were controlled by state specific laws too.

Thereafter, the Recovery of Debt and Bankruptcy Act (RDB), 1993 defined the term "bank". In 2013, "multi-state co-operative banks" was added to the definition.

Full benches of the High Courts of Bombay and Andhra Pradesh had taken the view that co-operative Banks can take action for recovery under the RDB Act, 1993.

In 2002, the SARFAESI Act was brought in, which further defined bank and multi-state co-operative banks. By a Central government notification passed in 2003, cooperative banks were allowed to proceed under the SARFAESI Act.

Later in 2007, the Supreme Court held that co-operative banks established under the Maharashtra Co-operative Societies Act, 1960, the Andhra Pradesh Co-operative Societies Act, 1964 and the Multi-State Co-operative Societies Act, 2002 transacting the business of banking, do not fall within the meaning of "banking company" as defined in Section 5(c) of the Banking Regulation Act.

The three-judge Bench in that case also held that the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, by invoking the doctrine of incorporation, are not applicable for recovery of dues by the co-operatives from their members.

In view of several conflicting decisions on the issue, a three-judge Bench of the Supreme Court headed by Justice Mishra referred the matter to a larger bench.

[Read the judgment]

Pandurang Ganpatii Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited.pdf
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