SC rules 'SARFAESI Act' is applicable to Cooperative Banks, Parliament has legislative competence to include them

The SC on May 5, 2020 {PANDURANG GANPATI CHAUGULE v. VISHWASRAO PATIL MURGUD SAHAKARI BANK LIMITED} held that the   co­operative   banks   registered   under   the   State legislation and multi State level co­operative societies registered under the Multi-­State Cooperative Societies Act, 2002 with respect to 'banking' are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India. 

The SC Constitution Bench, comprising of Justice Arun Mishra, Justice Indira Banerjee, Justice Vineet Saran, Justice M.R. Shah & Justice Aniruddha Bose held that the   co­operative   banks   run   by the   co­operative   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 of India, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution of India. It was held that the co­operative 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 a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of co­operative banks run by the co­operative societies. The Court held that co­operative banks cannot carry on any activity without compliance of the 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.

The Court held that co­operative   banks   under   the   State   legislation   and multi­ State co­operative banks are ‘banks’ under section 2(1)(c) of Securitisation   and   Reconstruction   of   Financial   Assets   and Enforcement of Security Interest Act, 2002. It was held that the recovery is an 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. It was further held that the Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under section 13 of the Securitisation   and   Reconstruction   of   Financial  Assets   and Enforcement of Security Interest Act, 2002 with respect to cooperative   banks. It was concluded that the   provisions   of   Section   2(1)(c)(iva),   of Securitisation   and   Reconstruction   of   Financial   Assets   and Enforcement of Security Interest Act, 2002, adding “ex abundanti cautela”, ‘a multi­ State co­operative bank’ is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the cooperative banks registered under the State legislation.

The   Parliament's   competence   to   amend   Section   2(c)   of   the SARFAESI Act by adding sub­clause '(iva) ­ a multi­-State co­operative bank'  was   questioned in this case before the SC.     The   issue also   arose before the SC, that is,  whether   the definition   of   'banking   company'   contained   in   Section   5(c)   of   the Banking Regulation Act, 1949 (for short, ‘the BR Act, 1949’) covers cooperative banks registered under the State law and also multi ­State co­operative societies under the Multi­-State Co­operative Societies Act, 2002   (for   short,   'the   MSCS   Act'). The said issues were referred to larger Bench by three-judge Bench of the SC. 

By the notification issued in 2003, the co­operative bank was brought within the 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. 15.1.2013.   Before that, the co­operative bank and the multi­ State co-operative bank took recourse to the SARFAESI Act under the notification issued in 2003.

In the present case the reference was made to Constitution Bench of Five Judges, and the moot question before the present Constitution Bench was the applicability of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, ‘the SARFAESI Act’) to the co­operative banks.

Accordingly, following questions of law arose for consideration before SC in reference, they were answered in the manner as stated below:

Whether 'co­operative banks', which are co­operative societies also, are governed by Entry 45 of List I or by Entry 32 of List II of the Seventh Schedule of the Constitution of India, and to what extent?

The SC held that it   is   apparent   that   deep   and pervasive   control   by the Reserve Bank of India is provided on primary credit society, which is involved in banking. It was held that as per the provisions of the BR Act, 1949, no business can be done by any co­operative society without obtaining a licence from the Reserve Bank of India. Further held that the very existence of the cooperative banks is dependent and is governed by the Reserve Bank of India Act as well as the BR Act, 1949. It was held that the aforesaid legislations are under Entry 38 and Entry 45, respectively, of List I of the Constitutionof India.

The Court held that the word 'banking' has never had any static meaning, and the only meaning will be the common understanding of men and the established practice about banking. Various forms of business come within the legitimate business of a bank.

The SC held that recovery   of   dues   would   be   an   essential   function   of   any   banking institution and the Parliament can enact a law under Entry 45 of List I as the activity of banking done by co­operative banks is within the purview of Entry 45 of List I. The Court held that it is open to the Parliament to provide the remedy for recovery under Section 13 of the SARFAESI Act. It was held that Co­operative bank's entire operation and activity of banking are governed by a law enacted under Entry 45 of List I, i.e., the BR Act, 1949, and the RBI Act under Entry 38 of List I.

The SC held that it is apparent that 'incorporation, regulation and winding up' of the co­operative societies are covered under Entry 32 of List II of the Seventh Schedule of the Constitution of India, whereas 'banking' is covered   by   Entry   45   of   List   I.     Thus, it was held that   aspect   of   'incorporation, regulation and winding up' would be covered under Entry 32 of List II. The Court held, however, banking activity of such co­operative societies/banks shall be governed by Entry 45 of List I. It was held that the said banks are governed and regulated by legislation related to Entry 45 of List I, the BR Act, 1949 as well as the Reserve Bank of India Act under Entry 38 of List I. The Court held that in the matter of licencing and doing business, a deep and pervasive control is carved out under the provisions of the BR Act, 1949 and banking activity done by any entity, primary credit societies, is a bank and is required to submit the accounts to the Reserve Bank of India, and there is complete control under the aforesaid Act. It was held that for activity of banking, these banks are governed by the legislation under Entry 45 of List I. The Court held that recovery being an essential part of the banking, no conflict has been created by providing additional procedures under Section 13 of the SARFAESI Act. It was held that it is open to the bank to adopt a procedure   which   it   may   so   choose. The Court held that when   banking   in   pith   and substance   is   covered   under   Entry   45   of   List   I,   even   incidental trenching upon the field reserved for State under Entry 32 List II is permissible.

The SC held that there can be various aspects of an activity. It was held that the co­operative societies may be formed under the provisions of the State Co­operative Acts. It was held that the   State   law   provides   for   'incorporation,   regulation   and winding up' under Entry 32 of List II, a membership registration, and other matters can be governed by Entry 32 of List II, and, at the same time, the aspects relating to the banking, licensing, accounts, etc. can be covered under Entry 45 List I. 

The Court relied upon the ratio of State   of   W.B.   v.   Kesoram   Industries   Ltd.   and   Ors. (2004) 10 SCC 201, in which a Constitution Bench of SC considered the aspects' theory and considered the field of taxation under Lists I and II and opined that there might be overlapping in fact, but there would be no overlapping in law. It was held that simply because the methodology or mechanism adopted for assessment and quantification   is   similar,   the   two   taxes   cannot   be   said   to   be overlapping. It was held in that case, that Entries 52, 53, and 54 are not heads of taxation. It was also held that the field of taxation is covered by Entries 49 and 50 of List II. It was held in that case, that the same transaction might involve two or more taxable events in its different aspects. It was held that merely because the aspects overlap, such overlapping does not detract from the distinctiveness of the aspects. It was concluded in that case, that there was no question of conflict solely on account of two aspects of the same transaction being utilized by two legislatures for two levies.

The Court held that legislation and entries are to be considered in pith and substance is the settled principles of law, and incidental trenching is permissible. The SC held that section 2(c)(iv)(a) of the SARFAESI Act and the notification dated 28.2.2003 cannot be said to be ultra vires. They are within the ken of Entry 45 List I of the Seventh Schedule to the Constitution of India.

The Court held that concept of regulating non­-banking affairs of society and regulating the banking business of society are two different aspects and are covered under different Entries, i.e., Entry 32 of List II and Entry 45 of List I, respectively. It was held that the law dealing with regulation of banking is traceable to Entry 45 of List I and only the Parliament is competent to legislate. The Court held that the Parliament has enacted the SARFAESI Act.   It was held that it does not intend to regulate the incorporation, regulation, or winding   up   of   a   corporation,   company,   or   co­operative   bank/cooperative society. It provides for recovery of dues to banks, including co­operative banks, which is an essential part of banking activity. The Court held that the Act in no way trenches on the field reserved under Entry 32 of List II and is a piece of legislation traceable to Entry 45 of List I.  

Whether ‘banking company’ as defined in Section 5(c) of the BR Act, 1949 covers co­operative banks registered under the State   Co­operative   Laws   and   also   multi­ State   co­operative societies?

The SC held that it is apparent that in order to avoid verbatim reproduction of the earlier provisions, which did not apply to a co­operative bank, a device was   carved   out   in   Section   56(a)   to   read   'company'   as   'banking company' or 'the company' or 'such company' as references to a cooperative bank. It was held that if the definition in Section 5(c) and interpretation clause are not read as incorporated and having been amended, the interpretation clause and the entire amendment of Part V will become unworkable. It was held that it was not practical to amend the entire Act of 1949 as it dealt with ‘incorporation, regulation and winding up’ of other entities relatable to List I, as such the provisions were required to be retained, and such matters concerning co­operative societies/banks, relatable subject­-matter under Entry 32 of List I of the Seventh Schedule of the Constitution of India, were to be excluded. The Court held that as various provisions were to be omitted in their application to the co­operative societies and other provisions were to apply in a modified form, the amendments were made in the provisions in their application to the co­operative banks by providing a separate Chapter. Thus, the SC held that it was not considered necessary nor would have been appropriate to amend the definition of Section 5(c) where it existed, in fact it was so amended in Section 56(a). It was held that entire Chapter V was enacted concerning the application of the Act to the co­operative banks and has to be given full effect. Merely because the procedure for recovery of dues is provided in the Cooperative   Societies   Act,   could   not   have   come   in   the   way   of interpretation   of   that   expression   'co­operative   bank'   which   was included in the definition and interpretation clause of Section 5 of the BR Act, 1949. It was held that it was open to the Parliament to deal with the subject of 'banking' in Entry 45 of List I and earlier Supreme Court in Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. and Ors. (2007) 6 SCC 236 itself opined that the BR Act, 1949 applies to co­operative banks which is the enactment related to Entry 45 of List I and third proviso to Article 243­ZL(1) of the Constitution of India also provides that the BR Act shall   also   apply.   The SC held that the Parliament considered   it   appropriate   to   provide   additional   remedy   for   speedy recovery   which   is   an   alternative   even   if   there   is   an incidental encroachment on the field reserved for the State under Entry 32 of List II, as in pith and substance, the 'banking' is part of Entry 45 of List I and recovery procedure is covered within the ken of Entry 45 of List I. Thus, the SC held that considering the Doctrine of Pith and Substance and incorporation by amendment made, the Court is of the considered opinion that co­operative banks are included in the definition of 'bank' and 'banking company' under Section 2(1)(c) and 2(1)(d) of the SARFAESI Act.

The Court held that co­operative   banks,   which   are   governed   by   the   BR   Act, 1949, are involved in banking activities within the meaning of Section 5(b)   thereof. It was held that they   accept   money   from   the   public,   repayable   on demand   or   otherwise   and   withdrawal   by   cheque,   draft,   order   or otherwise. The SC held that merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking. It was held that they perform commercial functions. The SC held that a society shall receive deposits and loans from members and other persons. It was held that they give loans also, and it is their primary function. It was held that they are covered under 'banking' in Entry 45 of List I.

Whether co­operative banks both at the State level and multi­ State level are 'banks' for applicability of the SARFAESI Act? Whether provisions of Section 2(c) (iva) of the SARFAESI Act on account of inclusion of multi State co­operative banks and notification dated 28.1.2003 notifying cooperative banks in the State are ultra vires? 

The SC held that 'banking' relating to co­operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co­operative banks in the SARFAESI Act. It was held that it cannot be said to be over-­inclusion on the anvil of the principles laid down by the Court.

The SC concluded that the SARFAESI Act qualifies 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.

Resultantly, the civil appeals, Writ petitions were disposed of, accordingly, in view of aforesaid, by the SC.