The Gujarat High Court recently struck down a notification dated 28th January, 2003 issued by the central govt. which brought the co-operative societies under the purview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), holding that the said notification was in conflict with the Bank Regulations Act, 1949 (‘BR Act’). The bench comprising of Justice Bhaskar Bhattacharya and Justice J.B. Pardiwala accepted the plea of about 70 defaulting borrowers of the cooperative banks that SARFAESI Act is not applicable to the co-operative banks formed under state law (The Gujarat Co-operative Societies Act) as the state legislation itself possesses effective machinery for the recovery of loan disbursed under it.
One of the chief contentions raised against the inclusion of co-operative banks in The Recovery Of Debts Due to Banks and Financial Institutions Act, 1993 (‘ RDB Act’) in the said case were that co-operative banks set up under various state legislations and the central enactment of The Multi-State Co-Operative Societies Act, 2002 already possess effective machinery for recovery of loans of their own. And the proposition was sought to be supported by a the Supreme Court judgment delivered in 2007 in the case of Greater Bombay Cooperative Bank Ltd. v. United Yarn Tex Pvt. Ltd., wherein it was held that the central legislation like the RDB Act was not applicable to the co-operative societies, as there was a mechanism for recovery of debts under the State Co-operative Societies Act.
The statement of objects and reasons of RDB Act was to speed up recovery of loans from banks and financial institutions. Merely because cooperative societies carried out the certain functions of banking, they are not banking companies and the provisions of RDB should not be extended to them. Secondly, it was raised that Section 56 of BR Act creates only a legal fiction by construing references to banking companies to co-operative societies and the same should only be limited to the BR Act. Thirdly, co-operative banks are excluded from the specified list of banking companies under Section 2(d) of the RDB Act. Fourthly, unlike as under Section 2(c)(v) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 where the Parliament specifically by notification had brought co-operative banks under the ambit of ‘banking companies’ by way of notification, no such notifications were issued for RDB Act.
As a counter, it was contended the RDB Act should be construed broadly to include cooperative banks, as they perform essential banking functions and their business is not restricted only to the members of cooperative societies. Further, the transaction of banking by cooperative banks is “patent, manifest and direct and it can neither be incidental nor ancillary”. It was also contended that the RDB Act being a special statute dealing with recovery of loans by banking companies should have precedence over Co-operative Societies Acts, which are general in their application.
Justice L S Panta speaking for the bench, made a distinction between banking undertaken by the co-operative banks and commercial banks and observed that the distinction between people’s co-operative banks serving their members and corporate banks doing commercial transactions is fundamental to the constitutional dispensation and understanding cooperative banking generally and in the context of co-operative banking not coming under the ambit of the Banking Regulation Act, 1949. “Thus, even if cooperative banks are involved in the activity of banking, which involves lending and borrowing , this is purely incidental to their main co-operative activity, which is a function in the public domain.’’ The apex court also considered Entry 45 OF List I and Entry 32 of( List II) and held that the cooperative societies would be covered under the latter i.e. the state list not the union one.
The decision arrived by the Gujarat High Court seems to been the above judgement and the definition of the banking company given in Sec. 5 ( c ) of the Banking Regulation Act, 1949—“ any company which carries out transaction of banking in India.” This doesn’t include co-operative banks per se. But it is noteworthy here that Sec. 56 of the Act lays that the provisions of the Act would apply to co-operative banks unless it has been provided otherwise.
With an amendment in the Enforcement of Security Interest and Recovery of Debt Laws Act 2012, now the definition includes bank has been modified to include ‘multistate co-operative banks’. It is respectfully submitted that the distinction between the co-operative banks and the commercial banks on the basis that the former lend money to their members only, does not substantially change the nature of business. It is further submitted that banking is a union subject under Entry 45 OF List I and as such Parliament has right to enact any law to provide any entity whether a corporate or non-corporate, or any association of persons conducting banking business, to be governed by banking laws including their regulation and recovery from defaulters. Therefore, the Debt Recovery Laws as passed by the Parliament must be extended to all ooperative Banks
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