CRUX:
Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited2016 (3) SCALE 433- In the present Appeal, the issue involved was whether cooperative banks at the state and multi-state levels fall under the SARFAESI Act's purview and do the SARFAESI Act's requirements apply to MSCS Act-registered cooperative banks.
DATE OF JUDGMENT:
05/05/2020
JUDGE:
Hon'ble Justice Ranjan Gogoi, Hon'ble Justice Arun Mishra, Hon'ble Justice Pafulla C. Pant
PARTIES:
Pandurang Ganpati Chaugule(Appellant)
Vishwasrao Patil Murgud Sahakari Bank Limited (Respondent)
SUMMARY
In the present Appeal, the issue involved was whether cooperative banks at the state and multi-state levels fall under the SARFAESI Act's purview and do the SARFAESI Act's requirements apply to MSCS Act-registered cooperative banks.
Brief
In this decision, the Supreme Court has finally resolved a long-standing dispute about the status of cooperative banks in relation to other banks in terms of the applicability of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
Background Facts
Part V of the BR Act, 1949, contains Section 56(c)(i)(cci), which becomes effective on January 1, 1966. A'state cooperative bank,' a 'central cooperative bank,' and a 'primary cooperative bank' are all included in the definition.
The cooperative bank was added to the list of banks eligible to use the SARFAESI Act's provisions after a notification was made in 2003. The SARFAESI Act was amended on 15.1.2013 to include Section 2(1)(c) (iva). Previously, the cooperative bank and the multiState cooperative bank had relied on the SARFAESI Act, which had been notified in 2003.
Pandurang Ganpati Chougule, the appellant, challenged Vishwasrao Patil MurgudSahakari Bank Limited's action under the SARFAESI Act before a Civil Judge on 13.8.2008 in Spl. Civil Suit No.226 of 2007.
The Trial Court held that it lacked jurisdiction to decide the case after deciding the preliminary issue. The first appeal, 6 (2007) 6 Mah. L.J. 387, was dismissed. The appeal has been filed in this Court in response to that.
A separate writ petition has been filed under Article 32 of the Indian Constitution, questioning the invocation of the SARFAESI Act by cooperative banks issuing notices under Section 13.
During the proceedings, the Central Government enacted the Enforcement of Security Deposit and Debts Law (Amendment) Act, 2012 (Act 1 of 2013), which changed the definition of Section 2(1)(c) of the SARFAESI Act; the amendment was also challenged in the writ petition filed in this Court.
Core Issues
- Whether cooperative banks at the state and multi-state levels fall under the SARFAESI Act's purview?
- Do the SARFAESI Act's requirements apply to MSCS Act-registered cooperative banks?
Court’s Observation and Decision
In the Pandurang Judgment, a Supreme Court constitution bench used the chance to correct the misconception in the Greater Bombay Case. The Court was asked a similar question in this instance, namely, ‘whether the provisions of the SARFAESI Act would apply to co-operative banks.' The Supreme Court maintained the inclusion of co-operative banks under the SARFAESI Act, overturning the verdict in the Greater Bombay Case.
Under Entry 45 of List I, co-operative banks fall under the scope and purview of ‘banking.'
The Supreme Court used the "doctrine of pith and substance" to determine that Entry 45 of List I, i.e. "banking," has the broadest scope imaginable, encompassing even co-operative bank activities such as debt recovery. On this basis, the Supreme Court determined that the Amendment and Notification can best be described as a "incidental intrusion" on List II Entry 32, which is legal.
When the legislature's legislative competence with regard to a certain statute is challenged due to encroachment/trespass on another's domain, the doctrine of pith and substance applies. This theory states that when assessing whether a law applies to a certain subject, the court should consider the substance of the case. As a result, if the substance is listed on one list, the law's mere "incidental encroachment" on another list does not render 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.
Despite the fact that aspects of co-operative societies' "incorporation," "regulation," and "winding up" are covered by Entry 32 of List II, the Supreme Court held that Entry 45 of List I would apply to their banking activities, and that even incidental encroachment on Entry 32 of List II would be permissible because they engage in "banking" activities.
Does the definition of a "banking corporation" under Section 5(c) of the BR Act include co-operative banks
To answer this question, the Supreme Court looked at the impact of Section 56(a) of the BR Act, which was enacted by the Banking Laws (Application to Co-operative Societies) Act, 1965 (1965 Act), on the definition of a "banking company" as defined by Section 5(c) of the BR Act, which states that a "banking company" is any company that transacts the business of "banking."
The Supreme Court recognised that co-operative banks are defined individually under Section 56(cci) of the BR Act, rather than being included in the definition of a "banking firm" under Section 5 of the BR Act (c). The legislature did this on purpose, according to the Court, to reconcile the applicability of the BR Act's requirements to co-operative banks and other banks and corporations. The Court went on to say that, though the BR Act's definition of "banking company" was not changed, a reference to a banking company shall be read as a reference to a co-operative bank as well because of Section 56(a).
It was vital to keep certain laws like incorporation, regulation, and winding up in their current form because they applied to other banks and enterprises but not to co-operative banks. As a result, the Supreme Court held that Section 56(a) becomes a part of Section 5(c), and that the term of "banking company" must be understood to encompass a co-operative bank, using the principle of "incorporation by reference."
As a result, the Court concluded that because the BR Act's definition of "banking company" covers co-operative banks, the SARFAESI Act's provisions must automatically apply to co-operative banks because the SARFAESI Act inherits the BR Act's definition of "banking company." To put it another way, co-operative banks will be treated as banks for the purposes of the SARFAESI Act.
Validity of the Amendment and the Notification under the Constitution
The Supreme Court concluded that the Central Government and Parliament were competent to issue the Notification and enact the Amendment, respectively, because co-operative banks' banking activities fall under the scope of Entry 45 of List I and only ‘inadvertently encroach' upon Entry 32 of List II, which is legal.
As a result, it is completely within Parliament's authority under Entry 45 of List I to provide for further methods under the SARFAESI Act for the recovery of dues by co-operative banks, and the Notification and Amendment are not extra vires the Constitution.
Conclusion
The Supreme Court has clarified a long-standing debate by recognising the applicability of the SARFAESI Act to co-operative banks, putting an end to the ambiguity. More importantly, the Pandurang Judgment removes the roadblocks imposed by previous inconsistent rulings on the matter, allowing cooperative banks to quickly recover their dues from defaulting borrowers without the need for court action.
The Pandurang Judgment, on the other hand, appears to allow ‘incidental encroachment' on State legislations by Central legislations, which may lead to courts taking a biased approach when faced with questions about an overlap between a Central Act and a State Act, which may be unfairly skewed in favour of Central legislations.
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