A five-judge Constitution bench of the Supreme Court (SC) on Tuesday held that cooperative banks across the country comes under the securitisation and reconstruction of financial assets and enforcement of security act (SARFAESI Act) and thus can initiate recovery proceedings against defaulters, says a report from Bar & Bench
The judgment was delivered by a Constitution bench of justices Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose.
"The Bench held that co-operative banks are 'banks' for the purposes of section 2(1)(c) of the SARFAESI Act, and that the recovery procedure under section 13 of the Act is also applicable to such banks," the report says.
SARFAESI act allows banks and other financial institution to auction residential or commercial properties of its defaulter to recover loans.
The judgment also states that co-operative banks registered under state-specific acts and multi-state level cooperative societies registered under the Multi-state Cooperative Societies Act, concerning 'banking' are governed by the legislation relatable to entry 45 of list I of the 7th schedule.
The argument that the 2013 amendment to the SARFAESI Act adding multi-state cooperative banks to Section 2(1)(c)(iva) was a 'colourable exercise of power' and thus was dismissed by the Bench, the news report says.
Bar & Bench report says, "The five-judge Bench has also unanimously held that co-operative banks involved in banking activities are covered u/s 5(c) & 56(a) of the Banking Regulation Act, 1949 which is a legislation relatable to Entry 45 of List I. Thus, the Court has held that cooperative banks cannot carry on any activity without compliance of provisions of the 1949 Act and any other legislation applicable to such banks and the Reserve Bank of India (RBI) Act."
The Court in effect also upheld the 2003 notification issued under the Banking Regulation Act, by which cooperative banks were brought within the class of banks entitled to seek recourse to the provisions of the SARFAESI Act, it added.
The SARFAESI Act was introduced in 2002, which defined bank and multi-state co-operative banks. By a union government notification passed in 2003, cooperative banks were allowed to proceed under the SARFAESI Act.
However, in 2007, while hearing a case, a three-judge bench of the Supreme Court held that cooperative banks established under the Maharashtra Cooperative Societies Act, the Andhra Pradesh co-operative societies act and the Multi-state Cooperative Societies Act, transacting the business of banking, do not fall within the meaning of 'banking company' as defined in Section 5(c) of the Banking Regulation Act.
The three-judge Bench in that case also held that the provisions of the recovery of debts due to banks and financial institutions act by invoking the doctrine of incorporation, are not applicable for recovery of dues by the cooperatives from their members.
However, in view of several conflicting decisions on the issue, a three-judge bench referred the matter to a larger bench.