Pandurang Ganpati Chaugule Vs Vishwasrao Patil Murgud Sahakari Bank Limited: Applicability Of The Provisions Of The Sarfaesi Act 2002 On Co-Operative Institutions And Banks

DATE OF JUDGMENT: 5th May, 2020.

JUDGES: Arun Mishra, Indira Banerjee, Vineet Saran, M.R. Shah.

PARTIES:

• Pandurang Ganpati Chaugule (Appellant)
• Vishwasrao Patil Murgud Sahakari Bank Limited (Respondent)

SUMMARY: The following case deals with whether or not the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, can be applied in co-operative banks and institutions.

OVERVIEW

1. Section 56(c)(i)(cci) is contained in Part V of the Banking Regulation Act, 1949, and was brought into force on 1.3.1966. It defines the term 'co−operative bank' to mean a 'state co−operative bank,' a 'central co−operative bank,' and a 'primary co−operative bank.' By the notification issued in 2003, the co−operative bank was brought within the class of banks entitled to seek recourse to the provisions of the SARFAESI Act. Section 2(1)(c) (iv) was inserted into the SARFAESI Act. 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.
2. 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 by including a ‘multi state co-operative bank’ within such definition.
3. This issue was heard by the court in several cases filed before it, Greater Bombay Co-op. Bank v. United Yarn Textiles Private Limited,1 for instance.
4. In the above 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).
5. In the present case, the appellant questioned the actions of the respondent bank under the SARFAESI Act before the trial court. Deciding the preliminary issue, the Trial Court held that it did not have the jurisdiction to decide the suit.
6. 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 co−operative banks.
7. 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.
8. The matter is now before the Supreme Court.

ISSUES

The following are the issues analyzed by the Supreme Court:

• Whether the amendment and the notification issued by the Central Government is constitutionally valid.
• Whether co-operative banks fall within the scope and ambit of “banking” under Entry 45 of List 1.
• Whether the provisions of the SARFAESI Act can be applied to co-operative banks as well.

IMPORTANT PROVISIONS

• Sec. 2(1)(c) (iv) of SARFAESI Act: inclusion of “subsidiary banks” in the definition of bank.
• Sec. 56(c)(i) of Banking Regulation Act, 1949: Definition of co-operative bank.
• Sec. 5(b) of Banking Regulation Act, 1949: Definition of banking.

ANALYSIS OF THE JUDGMENT

1. The counsel for the appellant contended that the scope of banking under Entry 45 of List I is to be interpreted in light of the definition of expression 'banking' in terms of Section 5(b) of the Banking Regulation Act, 1949, referring to the judgment given in the case of Rustom Cavasjee Cooper v. Union of India2, which the court held that 'banking' under Entry 45 did not include 'banker' or 'bank.' Banking is an activity. Entry pertains to the activity of banking alone.
2. As to the scope of Entry 45 List I, he further referred to the decision given in ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited and Ors,3 wherein it was emphasized that even if a company was doing different businesses in addition to clause (a) to (o) of Section 6(1), it would remain a banking company as long as it was performing the core banking functions under Section 5(b). The core banking function is the sine qua non for being regulated by the Banking Regulation Act, 1949. Therefore, 'banking' in Entry 45 of List I is essentially meant to be confined to 'core banking business'.
3. With regards to co-operative societies, he argued that Entry 43 of List I of the Seventh Schedule of the Constitution of India confers upon the Parliament the competence to pass law pertaining to 'incorporation, regulation and winding up' of a trading corporation, more particularly a banking corporation. However, 'co−operative societies' are expressly excluded from the purview of the Parliament's competence being a State subject under Entry 32 of List II. He argued that the legislative history of the Banking Regulation Act, 1949, made a difference between 'entity' and 'activity.'
4. He contended that an attempt to regulate the assets of a co−operative bank by bringing them within the purview of the SARFAESI Act is contrary to the original intent of the extending provisions of the Banking Regulation Act, 1949 and that would amount to exercising control over the entities which are beyond the purview of competence of Parliament.
5. The counsel for the appellant further submitted that Parliament is not competent to enact laws concerning co−operative societies/banks. Banking business for a co− operative society is merely an incidental/ancillary business. A co−operative society doing business remains a co−operative society and is covered under Entry 32 of List II.
6. The counsel appearing on behalf of the Reserve Bank of India contended that the matter is covered by Entry 45 of List I of the Seventh Schedule of the Constitution of India. For the very reason, the Parliament has the right to legislate in respect of the banking business as defined in Section 5(b) of the Banking Regulation Act, 1949.
7. He further contended that banking operations would inter alia include accepting of loans and deposits, the grant of loans and recovery of debts due to the bank. There can be little doubt that the Parliament can enact a law about the conduct of the business by a bank. Recovery of dues is an essential function of a banking institution. Entry 45 of List I would mean legislation regarding all aspects of banking, including ancillary or subsidiary matters relating to that. The SARFAESI Act falls within the ambit of Entry 45 of List I.
8. He also argued that Section 2(1)(c) is only a definition provision. The subject matter of legislation is securitisation, reconstruction of financial assets and enforcement of security interest of banks or financial institutions. The subject matter of legislation is not based on the entity
9. The court, however, held that co-operative institutions can be brought under the ambit of the provisions of the SARFAESI Act.
10. The 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.

CONCLUSION

The crux of the present case is the issue of whether or not co-operative banks and co-operative institutions can be included under the purview of the provisions of the SARFAESI Act.

The court, in this case, has answered in the affirmative. The court held that co-operative banks are defined separately under Section 56(cci) of the Banking Regulation 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 Banking Regulation 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.

By upholding the applicability of the provisions of the SARFAESI Act, the court has cleared a long-standing issue. This case would put to rest the confusion set forth by earlier judgments and provide the co-operative banks authority to recover dues from defaulting borrowers without having the need to avail the intervention of the courts. However, this 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.

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