Broader Implications Of The Supreme Court 's Pandurang Judgment On Co-operative Banks

Apart from the obvious effect of opening up SARFAESI benefits to such Co-operative Banks attempting to affect recovery, there are broader implications flowing from the judgment which need to be appreciated.

Preliminary

Before delving into the implications, it is important to sketch out the factual and jurisprudential matrix preceding the judgment on 5^th May, 2020.

Co-operative Banks are regulated under respective State Legislations dealing with the governance of Co-operative Societies, for example Section 2(10) of the Maharashtra Co-Operative Societies Act, 1960 defines a "Co-operative Bank" ("Co-operative Banks") and under the Multi-State Co-Operative Societies Act, 2002 under which Section 3(f) contains the definition for the bank ("Multi-State Co-operative Banks"). The obvious distinction between the two being that the latter deals with such banks with objects not confined to one State and serving the interests of members in more than one State.

By an amendment made to the Banking Regulation Act, 1949 ("BR Act") in 1965 (Act 23 of 1965), Section 56 was inserted which made the BR Act applicable on Co-operative Banks, later including Multi-State Co-Operative Banks as well.

In 2003, vide a notification^[1] issued under Section 2(1)(c)(v) to include Co-operative Banks within the ambit of "Bank" under SARAESI. Further, in 2013, Section 2(1)(c)(iva) was inserted^[2] into the SARFAESI and it expanded the definition of a Bank to include "a multi-State co-operative Bank" within its ambit. These were later challenged in the Pandurang case.

In the year 2007, Supreme Court through a three judge Bench decision in the case of Greater Bombay Coop. Bank v. United Yarn Tex (P) Ltd. and Ors.^[3]("Greater Bombay")had declared that Co-operative Banks weren't in fact "Banking Companies" under Section 5(c) of the Banking Regulation Act, 1965 ("BR Act") and therefore, not eligible to invoke recovery proceedings under RDB Act.

In 2008, using this ratio, Pandurang Ganpati Chougule had sought to challenge the decision of a Co-operative Bank to institute SARFAESI proceedings against him by arguing that Co-operative Banks are not covered within the definition of "Bank" under SARFAESI Act, and were not eligible to make use of measures available under it. In the Pandurang case, it has been held that all Co-operative Banks, single state and multi-state, are in fact covered within the definition of "Banking Company" under Section 5(c) of BR Act, and would be therefore covered within the definition of "Bank" under Section 2(1)(c)(i)read with Section 2(1)(d)of the SARFAESI ACT, allowing them to make use of recovery measures available therein. I will deal with the reasoning employed at a later stage in this article.

Implications

• Only Centre can make laws on Banking Business

Entry 45 of List I of the Seventh Schedule to the Constitution of India ("Union List") deals with "Banking", and Entry 32 of List II the Seventh Schedule to the Constitution of India ("State List") deals with incorporation, regulation and winding up of, inter alia, co-operative societies.

In Greater Bombay, the court had held that since "Co-operative Societies" are governed under Entry 32 of the State List, Central Laws such as SARFAESI and RDB will not be applicable on them, and recovery measures will have to be undertaken as per the provisions of respective State legislations dealing with the matter.

In Pandurang, the bench has drawn a distinction between the "Banking" and the "Non-banking" functions that these Banks, as Co-operative societies, perform. It was observed that, "In the matter of licensing 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. For activity of banking, these banks are governed by the legislation under Entry 45 of List I."

Hence, these two entries are mutually exclusive, and grant specific separate jurisdictions to the Central and State Governments to frame laws. So, while states have absolute prerogative governing the aspects of Co-operative Banks covered by Entry 32 of List II, the court has held that the entire gamut of "Banking" activity conducted by such banks will be covered under Entry 45 of List I, and thus will be governed by Central Laws.

• "Recovery" is an essential core part of Banking Business has been reaffirmed

In the case of Union of India and Anr. v. Delhi High Court Bar Association and Ors. case^[4] ("Delhi High Court Bar Association"), a three judge bench of the court had upheld the Centre's legislative competence to promulgate the RDB Act (then known as the Recovery of Debts due to Banks and Financial Institutions Act, 1993), by observing that the Entry 45 would include "all aspects of banking including ancillary or subsidiary matters relating to banking" and hence will include "recovery", allowing the Central Government to frame laws dealing with the same exclusively.

This ruling has been reaffirmed in Pandurang, and the court has held that the aspect of "recovery" is a core and essential part of "Banking" as covered by Entry 45 of List II, and is therefore to be governed under Central Laws, such as the RDB Act and the SARFAESI Act.

• Co-operative Banks are "Banking Companies" under BR Act

Greater Bombay, in which it was held that Co-operative Banks were not "banking companies" under BR Act and were therefore not eligible to opt for measures under the RDB Act, was based on the reasoning that since "Co-operative Banks" were not defined within Section 5(c) of BR Act, but in fact through a separate addition under Section 56 made via an amendment to the BR Act in 1965(Act 23 of 1965),"Parliament was simply assigning a meaning to words; it was not incorporating or even referring to the substantive provisions of the BR Act."

It concluded that it was never the intention of Parliament to extend the provisions of RDB Act to Co-operative Banks, since at the time of its passing, the legislature was aware that Section 2(d) of the RDB Act, defining "bank", will not include Co-operative Banks and Section 2(e) defining "banking company" would have its definition limited to what was covered under Section 5(c) of the BR Act; which, in its opinion, again will not include Co-operative Banks

Finding this reasoning to be erroneous, in Pandurang the Bench observed that even though the definition of Co-operative Banks existed in a different part of the statute, Section 56(a) amends the definition of a "Banking Company" under Section 5(c), since Section 56(a)(i) reads "throughout this act...references to a "banking company" or "the company" or "such company" shall be construed as references to a co-operative bank." By virtue of this, "Section 56(a) amends the definition of the 'banking company,' and it becomes an integral part of Section 5(c), as the full effect is required to be given."

Thus, Co-operative Banks are covered within the definition of "Banking Company."

• RDB Act and SARFAESI Act are applicable on Co-operative Banks

While Pandurang obviously opens SARFAESI for Co-operative Banks, we observe that the reasoning employed will affect applicability of RDB on them as well. While Section 2(d)(vi) of RDB already included Multi-state Co-operative Banks within the ambit of "bank". But we have also seen above, that Multi-state Co-operative Banks are included in the definition of a "Banking Company" by virtue of being a part of Section 56 of the BR Act.

Both Section 2(d)(i) of RDB Act and Section 2(1)(c)(i) of SARFAESI Act include "banking company" within the definition of "Bank". Further, under Section 2(e) of RDB and Section 2(d) of SARFAESI, definition of such "banking company" "shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949."

Having affirmed in Pandurang that Section 5(c) of BR Act does include "Co-operative" banks through Section 56(a)(i) of the same act, both RDB Act and SARFAESI Act become applicable on Co-operative Banks.

Specifically for SARFAESI, the court also considered a scenario where even if Section 5(c) were not to include Co-operative Banks, even then Section 2(1)(c)(v) of SARFAESI allows for the definition of 'bank' to include "such other bank which the Central Government may, by notification, specify for the purposes of this Act." The same has been done by the Government by virtue of a notification issued on 28.1.2003.^[5]

Ex Abundanti Cautela

In Paragraph 85, the court has observed that by virtue of doctrine of incorporation, Co-operative Societies/Banks (both single state and multi state) stand included in Section 5(1)(c), and that the notification issued in 2003 as well as the amendment made in 2013 were ex abundanti cautela. "By virtue of Section 56(a), co-operative banks, as defined in Section 56(cci) of the BR Act, 1949, are included in Section 5(c). Similarly, Multi-state Co-operative Banks were also covered."^[6][Emphasis mine]

It is my humble submission that while Section 2(d)(vi) of RDB Act was added by the 2013 amending act to include "multi-state co-operative banks" within the definition of "bank" under Section 2(d), considering these banks are already included in the definition of a "banking company" under Section 5(c) of BR Act, by virtue of Section 56(a) of the BR Act, it therefore automatically becomes a "bank" under Section 2(d)(i) and the 2013 amendment was, again, ex abundanti cautela.

Greater Bombay stands overruled

With the decision of Pandurang, the apex court has also effectively overruled the decision of Greater Bombay, whose ratio was based entirely upon the idea that Co-operative Banks aren't covered within the definition of "banking company" under BR Act.

Hence, both RDB Act and SARFAESI Act can be employed by Co-operative Banks, both single state and multi state, in their attempt to affect recovery.

• State Laws on Recovery are inapplicable henceforth

Several state legislations dealing with Co-operative Societies, such as Section 91 of the Maharashtra Co-operative Societies Act, 1960, or Section 84 of the Multi-State Co-operative Societies Act, 2002 provide for recovery measures for Co-operative Banks. For example, under the Maharashtra Co-operative Societies Act, any dispute relating to constitution, management or business is required to be referred to a Co-­operative court, Recovery Certificate is obtained and execution of it under Section 156 is delegated to Bank Officers, at which stage it rather becomes similar in essence to a Section 13(4) Possession Notice under SARFAESI.

Since it has been established that recovery is a part of the core essential business of Banking under Entry 45 of List I, and the regulation of such business is the sole prerogative of the Central Government, a question arises as to the fate of the recovery measures allowed for by State Legislatures governing Cooperatives.

To my understanding, the holding of the Full Bench of the Bombay High Court in the case of Narendra Kantilal Shah v. Joint Registrar, Co-operative Societies^[7](which was overruled by the apex court in Greater Bombay) that with the coming of the RDB Act, state legislations cease to have jurisdiction to entertain the application submitted by co-operative banks for the recovery of their dues, stands affirmed.

Since recovery can only be covered under Entry 45 of List I and not under Entry 32 of List II, the extant state laws, to the extent that they deal with recovery, are ultra vires, and are no longer applicable.