cpc

SARFAESI Act & Co-op. banks

Through the judgment delivered on May 5, 2020, a 5 - Judge Bench of the Supreme Court , consisting of Justices Arun Mishra, Indira Banerjee, Vineet Saran, M.R.Shah and Aniruddha Bose, while deciding a group of civil appeals and writ petitions including the civil appeal - Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd., have held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - SARFAESI Act govern the Co-operative banks registered under the State legislation and multi-State level co-operative societies registered under the MSCS Act, 2002 with respect to 'banking'.

Answering a Reference made to this Bench in view of conflicting decisions on this aspect, the Apex-Court has given the finding that the SARFAESI Act passes the test of legislative competence, as well as the definition, cannot be said to be colourable piece or over-inclusive or beyond the competence of the Parliament and is relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India.

The co-operative banks run by the co-operative 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, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution.

The co-operative 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 legislation relatable to Entry 45of List I. It governs the aspect of 'banking' of co-operative banks run by the co-operative societies. The co-operative banks cannot carry on any activity without compliance of 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.

These cases were referred to this 5-Judge Bench in view of conflicting decisions in the cases - Greater Bombay Co-operative Bank Ltd. v. United Yarn Tex(P) Ltd. and Others- (2007)6 SCC 236, Delhi Cloth and General Mills Co. Ltd. v. Union of India and Others- (1983) 4 SCC 166, T. Velayudhan Achari and Another v. Union of India and Others - (1993) 2 SCC 582 and Union of India and Others v. Delhi High Court Bar Association and Others - (2002) 4 SCC 275.

The question relates to the scope of the legislative field covered by Entry 45 of List I namely, 'banking' and Entry 38 of List II of the Seventh Schedule of the Constitution, consequently power of the Parliament to legislate. The moot question has been the applicability of the SARFAESI Act, 2002 to the co-operative banks.

The Parliament's competence to amend section 2(c) of the SARFAESI Act by adding sub-clause '(iva)- a multi-State co-operative bank ' has been also questioned. The issue, which arose was whether the definition of 'banking company' contained in section5(c) of the Banking Regulation Act, 1949 - BR Act,1949 covers co-operative banks registered under the State law and also multi-State co-operative societies under the MSCS Act, 2002. The two questions arising here and answered quite emphatically in affirmative by the Supreme Court are: (i) whether the co-operative banks at the state and multi-State level are the co-operative banks within the purview of the SARFAESI Act? and (ii) whether provisions of the SARFAESI Act apply to the co-operative banks registered under the MSCS Act.

Section 56(c) (i) (cci) is contained in Part V of the BR Act, 1949 and was brought into force on March 1, 1966. By the notification issued in 2003, the co-operative bank was brought within 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. January 15, 2013. Before that, the co-operative bank and the multi-State Co-operative bank took recourse to the SARFAESI Act under the notification issued in 2003.

Writ petitions were filed questioning the validity of notification of January28, 2003 issued under section 2(1) (c)(v) of the SARFAESI Act and the insertion of section 2(1) (c) (iva) into the SARFAESI Act in 2013.In WP 2672/2007, dismissing the petition, Bombay High Court had upheld the action of the Jalgaon People's Co-operative Bank of invoking the provisions of the SARFAESI Act. Appeals were filed against the Bombay HC's decision.

On August 13, 2008, appellant Pandurang Ganpati Chougule questioned the action of respondent - Murgud Sahakari Bank under the SARFAESI Act before the Civil Judge I Special Civil Suit 226/2007.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 Supreme Court has been moved by filing the appeal. A separate writ petition under Article 32 of the Constitution was also filed questioning the invocation of the SARFAESI Act by issuing notices under section 13 by co-operative banks. During pendency of these matters, the Central Govt. brought into force the Enforcement of Security Deposit and Debts Law(Amendment) Act,2012 amending the definition of section 2(1)(c) of the SARFAESI Act; the amendment has been also questioned in the writ petition filed in the Supreme Court.

On July 30, 2015, the matter was referred to a larger bench. After that, on February 26, 2016,a 3-Judge Bench referred the matter to a larger Bench, due to conflicting decisions.

The Co-operative banks under the State legislation and multi-State co-operative banks are 'banks' under section 2(1)(c) of the SARFAESI Act, 2002.The recovery is 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.

The Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution to provide additional procedures for recovery under section 13 of the SARFAESI Act, 2002 with respect to co-operative banks. The provisions of section 2(1)(c)(iva) of the SARFAESI Act, 2002, adding “ex abundant cautela”, 'a multi-State co-operative bank' is not ultra vires as well as the notification of January 28, 2003 issued with respect to the co-operative banks registered under the State legislation.

 

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