Pandurang Ganpati Chaugule Vs. Vishwasrao Patil Murgud Sahakari Bank Limited, 2020

Author: Somya Agrawal

INTRODUCTION:

An impending issue regarding the status of co-operative banks vis-a-vis other banks in relation to the applicability of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as SARFAESI Act) has finally been adjudicated by the Supreme Court in its latest judgment of Pandurang Ganpati Chaugule vs. Vishwasrao Patil Murgud Sahakari Bank Limited[1] on 5th May 2020 (hereafter referred to as Pandurang Judgment).

FACTS:

In the wake of changing needs of the society and economic growth of the nation, the legislation enacted by the Parliament needed to be rectified, therefore the Central Government had issued a notification dated 28 January 2003[2]extending the provisions of the SARFAESI Act to co-operative banks also due to which several petitions were being filed challenging the applicability of the Notification. The Parliament deemed it appropriate to amend the definition of ‘bank’ under the SARFAESI Actby including a ‘multi-state co-operative bank’ within such amended definition as a result of which a plethora of writ petitions was filed challenging the amendment.

In an earlier Judgment regarding the same issue that is the Greater Bombay case[3] , a three-judge bench of the Supreme court restrictively construed that the co-operative bank cannot approach the Debts Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993 (RDBAct)[4] for recovery of their dues. The court opined that the co-operative banks fall under Entry 32 of List II (State List) of the Seventh Schedule (Entry 32 of List II)[5] of the Constitution of India and therefore the Parliament is not competent to legislate with regard to co-operative banks under Entry 45 of List I (Union List) of Seventh Schedule[6]. On the basis of this reasoning, the Court reiterated at the conclusion that a co-operative bank cannot be considered as a ‘banking company’ under the Banking Regulation Act, 1949 (BR Act)[7] and hence, the provisions of the former Act cannot be maintained by such banks to recover their dues.

On 13 August 2008, PandurangGanpatiChaugule – the appellant, questioned the action of Vishwasrao Patil Murgud Sahakari Bank Limited under the SARFAESI Act before the Civil Judge in Spl. Civil Suit. Deciding the foremost issue, the Trial Court held that it did not have the jurisdiction to decide the suit. The first appeal preferred was dismissed. Against that, the appeal has been preferred before this Court. A separate writ petition under Article 32 of the Constitution of India has also been filed, questioning the scope of the SARFAESI Act by issuing notices under Section 13 by co-operative banks. During the pendency of the matter with other petitions, the Central Government brought into force the Enforcement of Security Deposit and Debts Law (Amendment) Act, 2012 [8]amending the definition of Section 2(1)(c) of the SARFAESI Act[9] whose validity has also been questioned in the writ petition filed in this Court.

ISSUES ARGUED:

● Whether the scope of " banking " under Entry 45 of List I of Seventh Schedule of the Constitution pertains to be interpreted in consonance with Section- 5(b) of the BR Act wherein the definition of " banking " is mentioned.

● Whether there is colourable legislative power exercised by the Central Government to extend it to the matters in the State list against the constitutional mandate.

● Whether the provisions of the SARFAESI Act would apply to co-operative banks.

● Whether a ‘banking company’ as defined in Section 5(c) of the BR Act, 1949 covers co-operative banks registered under the State Co-operative Laws with multi­ State co-operative societies.

● Whether co-operative banks at the State level, as well as multistate level, are ‘banks’ for applicability of the SARFAESI Act.

JUDGEMENT:

A Constitutional bench of the Supreme court comprising of the above mentioned judges reiterated the doctrine of " Pith and Substance " wherein the most essential part of any law or the true nature of law can be determined by seeing the subject matter of the entry (that is, the doctrine purports that where the question arises of determining whether a particular law relates to a particular subject or not, the court shall look to the substance of the matter. Therefore, if the subject falls within one list, then a mere ‘incidental encroachment’ by the law on another list does not make it invalid). Hence, Entry 45 of List I is the widest possible amplitude comprising the activities of the co-operative bank within its purview. The Court contended that on this explanation the amendment and the notification are not ultra vires and are correctly permissible by law.[10]

The Supreme court also contended that the co­operative banks regulated by the co­operative societies registered under the State legislation with respect to the aspects of ‘incorporation, regulation and winding up’ coupled up with the fact that they 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 that is,Entry 32 of List II of the Seventh Schedule of the Constitution of India.

The co-operative banks involving the activities related to banking are covered within the meaning of ‘Banking Company’ defined under Section 5(c) read over with Section 56(a) of the Banking Regulation Act, 1949, which is indeed a legislation under Entry 45 of List I.

The co-operative banks under the State legislation and multi­State co-operative banks are ‘banks’ under section 2(1)(c) of SARFAESI Act, 2002.

CONCLUSION:

The Supreme Court in this judgment has taken away its fallacy made in the Greater Bombay case of contending that the co-operative bank is not within the purview of the SARFAESI Act. It was also reiterated that the Constitutional doctrines should be applied with abundant caution so as not to encroach upon any of the mandates declared by the Constitution. The segregation of powers in the lists of Seventh schedule was put there with intellect so that no State can infringe upon each other's rights. On the other hand, the Pandurang Judgment seems to be bent towards the ‘incidental encroachment’ on State legislations by Central legislations, which may result in courts taking a biased approach when faced with questions pertaining to overlapping between a Central Act and a State Act, which may unfairly be tilted in favour of Central legislations. By resolving this dispute, the apex court has settled all the impending controversies regarding the Constitutional validity of the SARFAESI Act.

References:

[1]PandurangGanpatiChaugule vs. VishwasraoPatilMurgudSahakari Bank Limited,[2020] ibclaw.in 09 SC [2]DRT Notification No. S. O. 105(E). [3]Greater Bombay Co-op Bank Limited vs. United Yarn Textiles Private Limited, (AIR 2007 SC 2325) [4]https://insolvencyandbankruptcy.in/wp-content/uploads/2019/01/Recovery-of-Debt-Due-to-Banks-Financial-Institutions-Act-1993-1.pdf [5]https://www.mea.gov.in/Images/pdf1/S7.pdf [6]Ibid., see the previous footnotes. [7]https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.pdf [8]Act 1 of 2013. [9]http://arcindia.co.in/assets/img/SARFAESI-2002.pdf [10]Also see RustomCavasjee Cooper Versus Union of India, (1970 AIR 564).