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2020 (5) TMI 148 - SC - Indian LawsApplicability of SARFAESI Act to the co-operative banks - Scope of the legislative field covered by Entry 45 of List I viz. Banking and Entry 32 of List II of the Seventh Schedule of the Constitution of India - power of the Parliament to legislate - competence to amend Section 2(c) of the SARFAESI Act by adding subclause '(iva) a multi-State co-operative bank' - co-operative banks at State and multi-State level are co-operative banks or not. Whether 'co-operative banks', which are co-operative 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? - HELD THAT - Section 6 deals with the forms of business in which banking companies may engage. There cannot be any form of activity/business of banking without there being an entity. Section 6 is not a provision of the conferral of the status of the banking company. The definitions of 'banking' and 'banking company' are contained in Section 5(b) and 5(c) of the BR Act, 1949 respectively, and when reading with Section 56(a), it means co-operative banks also. The co-operative bank falls within the definition of Section 5(c), and its activity is of banking, and in addition to the business of banking, a co-operative bank may engage in any of the business as enumerated in Section 6 - the 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 co-operative banks is within the purview of Entry 45 of List I. Obviously, it is open to the Parliament to provide the remedy for recovery under Section 13 of the SARFAESI Act. Co-operative 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 - There can be various aspects of an activity. The co-operative societies may be formed under the provisions of the State Co-operative Acts. 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 legislation and entries are to be considered in pith and substance is the settled principles of law, and incidental trenching is permissible. Thus, 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 SARFAESI Act is relatable to Entry 6 of List III considering the provisions contained in Sections 69 and 69A of the Transfer of Property Act, 1882. It relates to Entry 45 of List I of the Seventh Schedule of the Constitution of India. The concept of regulating nonbanking 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. The law dealing with regulation of banking is traceable to Entry 45 of List I and only the Parliament is competent to legislate. The Parliament has enacted the SARFAESI Act. It does not intend to regulate the incorporation, regulation, or winding up of a corporation, company, or co-operative bank/co-operative society. It provides for recovery of dues to banks, including co-operative banks, which is an essential part of banking activity. 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 - the U.P. Co-operative Services Act was saved on the ground of incidental trenching on the subject of another list, i.e., Entry 45 List I, which is permissible. Whether banking company as defined in Section 5(c) of the BR Act, 1949 covers co-operative banks registered under the State Co-operative Laws and also multi-State co-operative societies? - HELD THAT - The present one is a case of incorporation by reference in the same Act by a subsequent amendment in the application to co-operative banks. When we apply the provisions of Section 5(c) to the co-operative banks, we have to read the co-operative banks as part and parcel of said definition as mandated statutorily. In case a company is not taken as a reference to the co-operative societies/banks in Section 5(c), several problems as to the interpretation of Section 56 would arise. It would have become necessary to amend all the provisions wherever words 'banking company' occur in the BR Act, 1949 in the application to co-operative banks - 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, considering the Doctrine of Pith and Substance and incorporation by amendment made, we are of the considered opinion that co-operative 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 co-operative banks, which are governed by the BR Act, 1949, are involved in banking activities within the meaning of Section 5(b) thereof. They accept money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking - They perform commercial functions. A society shall receive deposits and loans from members and other persons. They give loans also, and it is their primary function. Thus, they are covered under 'banking' in Entry 45 of List I. Whether co-operative banks both at the State level and multi-State level are 'banks' for applicability of the SARFAESI Act? - HELD THAT - The co-operative banks under the State legislation and multi-State co-operative banks are banks under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 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. Whether provisions of Section 2(c) (iva) of the SARFAESI Act on account of inclusion of multi-State co-operative banks and notification dated 28.1.2003 notifying co-operative banks in the State are ultra vires ? - 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 co-operative banks. 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 co-operative bank is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the co-operative banks registered under the State legislation. Petition disposed off.
Issues Involved:
1. Legislative competence regarding the applicability of the SARFAESI Act to co-operative banks. 2. Definition of 'banking company' under the BR Act, 1949 and its applicability to co-operative banks. 3. Applicability of the SARFAESI Act to co-operative banks and the validity of related amendments and notifications. Issue-Wise Detailed Analysis: 1. Legislative Competence Regarding the Applicability of the SARFAESI Act to Co-operative Banks: The core question was whether co-operative banks fall under Entry 45 of List I (Union List) or Entry 32 of List II (State List) of the Seventh Schedule of the Constitution of India. The judgment clarified that co-operative banks, despite being co-operative societies, are governed by legislation related to Entry 45 of List I concerning 'banking'. The court emphasized that the term 'banking' has a broad meaning, encompassing various activities performed by co-operative banks, which include accepting deposits and granting loans. The court held that the Parliament has the legislative competence to enact laws regarding the recovery of dues by co-operative banks under Entry 45 of List I, as recovery is an essential function of banking. 2. Definition of 'Banking Company' Under the BR Act, 1949 and Its Applicability to Co-operative Banks: The judgment examined whether the definition of 'banking company' under Section 5(c) of the BR Act, 1949 includes co-operative banks. The court observed that Section 56(a) of the BR Act, 1949, which was incorporated by Act No. 23 of 1965, explicitly states that references to 'banking company' should be construed as references to a co-operative bank. This incorporation by reference means that co-operative banks are included within the definition of 'banking company' for the purposes of the BR Act, 1949. The court reasoned that the legislative intent was to regulate co-operative banks under the same framework as other banking companies, thereby bringing them within the purview of the BR Act, 1949. 3. Applicability of the SARFAESI Act to Co-operative Banks and the Validity of Related Amendments and Notifications: The court addressed whether co-operative banks are covered under the SARFAESI Act and whether the amendments and notifications related to them are valid. The judgment affirmed that co-operative banks are 'banks' under Section 2(1)(c) of the SARFAESI Act. The court held that the Parliament has the legislative competence to provide additional procedures for recovery under Section 13 of the SARFAESI Act, as recovery is an integral part of banking activity. The court upheld the validity of Section 2(1)(c)(iva) of the SARFAESI Act, which includes 'a multi-State co-operative bank', and the notification dated 28.1.2003 specifying co-operative banks as 'banks' for the purposes of the SARFAESI Act. The court reasoned that these provisions are within the legislative competence of the Parliament under Entry 45 of List I and do not encroach upon the State's domain under Entry 32 of List II. Conclusion: The judgment concluded that co-operative banks are governed by the BR Act, 1949, and the SARFAESI Act concerning their banking activities. The Parliament has the legislative competence to enact laws for the recovery of dues by co-operative banks, and the relevant amendments and notifications under the SARFAESI Act are valid. The court's interpretation ensures that co-operative banks are subject to the same regulatory framework as other banking institutions, thereby facilitating efficient recovery of dues and maintaining financial stability.
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