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Judgment
N. Kumar, J.—The constitutional validity of item (v) of clause (c) of subsection (1) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, hereinafter referred to as "the Act") is the subject-matter of W. P. No. 2755 of 2008. Further the petitioners in the said writ petition are also seeking for quashing of the notification bearing No. S. O. 105(E) issued by the Central Government, Ministry of Finance and Company Affairs (Department of Economic Affairs) (Banking Division) dated January 28, 2003 See [2003] 114 CC (St.) 95, where-under, the Central Government specifies "co-operative bank" as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949, as "bank" for the purpose of the Act. The very same petitioners challenged the action of the authorised officer in issuing notice u/s 13(2) of the Act, on the ground that the Act is not applicable to the loans advanced by co-operative banks in W. P. No. 23813 of 2005. The learned single judge of this Court allowed the writ petition by his order dated July 12, 2007, following the judgment of the apex court in Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, and held that the banking company as defined u/s 5(c) of the Banking Regulation Act, 1949, does not include or encompass the co-operative bank. Therefore, the Act, is not applicable to the loans advanced by co-operative banks. Aggrieved by the same, the bank has preferred Writ Appeal No. 2382 of 2007.
Following the judgment of the learned single judge, several writ petitions have been allowed and challenging those orders, writ appeals are preferred. Similarly, orders passed by the authorities under the Co-operative Societies Act, have been challenged in several writ petitions before this Court. As common question of law arise for consideration in all these matters, they are placed before this Court for decision. Hence, all these matters are taken up for consideration together and disposed of by this common order. However, for the purpose of convenience, the facts in W. P. No. 2755 of 2008 are set out to have a factual background.
Factual matrix
The Karnataka Rajya Kaigarika Sahakara Bank Niyamita (for short hereinafter referred to as "the bank"), advanced loan to M/s. High Tech Industries, a registered partnership firm. The firm committed default in repayment of loan. A demand notice was forwarded to the first petitioner V. Krishnaswamy, on the assumption that he owned and possessed the dwelling house bearing No. 221, 2nd E Cross, 6th Main, 3rd Block, I Stage, Basaveshwara Nagar, Bangalore-86. In fact, the schedule property is owned and possessed by the second petitioner, the wife of the first petitioner. The second petitioner became the owner of the said property under a registered gift deed dated July 22, 2003, executed by the first petitioner in favour of the second petitioner. According to them, it is a Stree Dhana property.
The bank instituted Dispute No. 1366/2000-01 which later came to be re-numbered as Dispute No. 1244/05 u/s 70 of the Karnataka Co-operative Societies Act, 1959 and obtained ex parte award against M/s. Hi-tech Industries and others, including the petitioner. In appeal, the Karnataka Appellate Tribunal, Bangalore, by its order dated September 9, 2003, set aside the ex parte award and remanded the matter for fresh trial. After such remand, the second respondent initiated action u/s 13(2) of the Act, claiming itself as a "bank" on par with co-operative banks through the third respondent is its authorised officer. In the said proceedings, the dwelling house belonging to the wife of the petitioner was described as owned by the first petitioner and was put up for sale.
The authorised officer purporting to exercise his powers u/s 13(2) of the Act, issued notice dated January 1, 2004, to M/s. Hi-tech Industries, calling upon it to discharge the loan borrowed by it with interest thereon, within 60 days from the date of the notice. A copy of the said notice was forwarded to the first petitioner who received it on January 12, 2004. In the notice, the first petitioner was shown as the owner of the schedule property. He objected to the same by filing statement of objection on February 15, 2004. He also filed W. P. No. 6537 of 2004 on February 16, 2004, challenging the validity of the said notice. In the meanwhile, the authorised officer proceeded to issue the possession notice dated March 31, 2004, purporting to act u/s 13(4) of the Act, which made the first petitioner to amend the writ petition, to include the prayer for quashing of the said possession notice. By order dated April 16, 2004, this Court set aside the possession notice with a direction to the respondents to consider first the objection filed by the first petitioner to the notice issued u/s 13(2) of the Act and to communicate the reasoning either accepting or rejecting the same. The second respondent sent a communication to the first petitioner rejecting his objection without assigning proper reasons and without considering the material objections. Therefore, petitioners Nos. 1 and 2 filed W. P. No. 15389 of 2005 and W. P. No. 16516 of 2005 challenging the competence and jurisdiction of the respondents to proceed against the first petitioner and the dwelling house of the second petitioner u/s 13(1), (2) and (4) of the Act. The said writ petitions were rejected by order dated August 24, 2005, directing the petitioners to raise the above grounds before the Debts Recovery Tribunal as and when the cause of action arises. The second respondent took steps to publish the possession notice dated March 31, 2004, in Vijaya Karnataka, Kannada newspaper on September 22, 2005. Thereafter, the second respondent sent a communication bearing No. 4280/05-06 dated February 1, 2005, threatening the first petitioner, that the property described as schedule property therein would be sold on November 16, 2005, at 11.30 a.m. In those circumstances, the petitioner filed these writ petitions seeking quashing of the notices dated October 1, 2005, publication of possession notice in the newspaper and quashing the entire proceedings initiated u/s 13(2) and (4) of the Act, including the sale of the schedule property.
Findings and reasoning of the learned single judge
The learned single judge, who heard the writ petition filed by the petitioners, held that the definition of "bank" under the Act, cannot be termed as banking company. Banking company as defined u/s 5(c) of the Banking Regulation Act, 1949, does not include or encompass the co-operative bank. Therefore, no proceedings could have been initiated by the co-operative bank against the petitioners under the Act. The dues of co-operative bank and recovery proceedings thereof are self regulated, inasmuch as, under the Karnataka Co-operative Societies Act, any amount due by a borrower to the co-operative bank, a dispute can be raised u/s 70 of the Co-operative Societies Act for recovery of the said amount. The meaning of "banking company" must necessarily be strictly confined to the words used in section 56 of the Banking Regulation Act, 1949. It was easy for Parliament to say that banking company shall mean "banking company" as defined in section 56 and shall include co-operative bank as defined in section 5(cci) and primary co-operative bank as defined in section 5(ccv). This would necessarily lead to a logical conclusion that there was a conscious exclusion of the co-operative bank from the purview of the Act. The reason for excluding co-operative banks seems to be that co-operative banks have comprehensive, self contained and less expensive remedies available to them under the Co-operative Societies Act, while other banks and financial institutions did not have such speedy remedies and they have to file suits in the civil courts. The apex court in the aforesaid judgment has held that the co-operative banks performing functions for the public with a limited commercial function as opposed to corporate banks cannot be covered by Entry 45 of List I dealing with "banking". The subject of co-operative societies is not included in the Union List, rather it is covered under Entry 32 of List II of Seventh Schedule appended to the Constitution. Therefore, he held that the Act is not applicable to the loans advanced by co-operative banks and quashed all the proceedings initiated by the co-operative societies under the Act against the petitioners. The correctness of the said order is in appeal.
After the filing of the Said appeal, the petitioners in the aforesaid writ petitions have preferred these writ petitions challenging the constitutional validity of item (v) of clause (c) of sub-section (1) of section 2 of the Act and the notification issued under the Act.
Rival contentions
Learned Counsel for the petitioner Sri Kothavale, challenging the validity of the aforesaid provisions and the notification issued under that provision contended that express exclusion of co-operative societies in Entry 43 of List I and the express inclusion of co-operative societies in Entry 32 of List II separately clearly indicated that the constitutional scheme was designed to treat co-operative societies as institutions distinct from corporations. Therefore, the co-operative societies/banks cannot be said to have been covered by legislative Entry 45 of List I. The subject of co-operative societies/banks is not included in the Union List. It is expressly included in the State List. Hence, the Central Legislation like the Act, cannot put the co-operative bank which in essence is a co-operative society constituted under the Co-operative Societies Act of the State, on par with the corporate banks for the purpose of recovery; of dues from the borrower under the provisions of section 13 of the Act. The introduction of co-operative bank into the Act, makes that provision repugnant to the rest of the texts of the Act and to the scheme underlying the Act. The Karnataka Co-operative Societies Act is a self contained code and it provides among other things, a recovery process in respect of a claim of the society for any debt due to it u/s 70(2) of the Karnataka Co-operative Societies Act. It is a speedy remedy available to the co-operative societies. Therefore, the co-operative societies/banks cannot be the subject-matter of the Central Legislation and they cannot be put in the same category as corporate banks for the purpose of enforcing security interest. The co-operative society/ bank cannot be a banking company or a corporate bank and take the same colour for the purpose of the Act. Rule of ejusdem generis is attracted. It is totally alien to the scheme, scope and substance of the said Act. The power delegated to the Central Government by section 2(1)(c)(v) of the Act is excessive and arbitrary. No guidelines for exercise of delegated powers are laid down by Parliament. There is nothing in the Act to limit the power of the Central Government as to the framework of the policy of the Legislature and its legislative intent. Therefore, the issue of notification as in annexure A is arbitrary and not in consonance with the principles of ancillary or subordinate legislative function governing the delegation of power. The exercise of delegated powers by the Central Government by section 2(1)(c)(v) of the Act is not within the framework of the policy of the Central legislation. The Central legislation has indicated the class and categories of banks that were intended to be dealt with by the Act. The type, nature and character of banks to be specified by the Central Government, by virtue of its delegated powers cannot be from a class of banks, which Parliament itself cannot cover while enacting a law. Therefore, he submits that the said notification also requires to be quashed.
Per contra, it was contended that although Entry 43 of List I relates to incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including co-operative societies. Entry 45 specifically confers legislative power in relation to banking on the Central Legislature and on Parliament. The exercise of executive power in the present case, which is co-extensive with legislative power, is under the said Entry 45. The law relating to construction of the legislative Entries of the various lists of the Seventh Schedule is well established and no longer res integra. The doctrine of pith and substance postulates that where a particular action is being examined vis-a-vis conferment of power under the said schedule, the legitimacy of the action must be examined with a view on the pith and substance of the action and to examine the true character of the action, its object, its scope and effect, in order to determine whether there has been a valid exercise of the power conferred under the Schedule or whether the exercise of power has been ultra vires. Where a action is found to relate, in substance, to a topic within the competence of the Legislature and consequently the corresponding executive, the said action is to be held intra vires, even if the same incidentally trenches upon topics which are outside the powers conferred by the applicable List of the Seventh Schedule. The mere fact that there appears to be a superficial overlap in respect of action taken as per the power conferred by one List with powers conferred by another List, would not affect the validity of the action, so long as the pith and substance thereof falls within the power conferred by the List which operates relating to the Legislature/executive concerned. Apart from the doctrine of pith and substance, the action of the Central Government in issuing the impugned notification is also valid under the doctrine of ancillary powers, whereby the power of the Legislature and concomitantly the power of the corresponding executive Government under the various Lists is recognised to extend to cover such ancillary and incidental topics relating to exercise of such power. It is also well established that the Entries of the Lists in Seventh Schedule must be read in the widest possible manner. So read, the power of the Central Government extends to banking which is specified at Entry 45 of List I of Seventh Schedule. In so far as co-operative societies engaged in banking activities are concerned, they clearly fall within the said Entry. The Central Government will indisputably have jurisdiction over them to the extent that their activities are, or relate to, banking activities. The very fact that Entry 43 of List I specifically contains words excluding co-operative societies whereas Entry 45 of the said List is not so limited indicates that the latter is not to be construed as having any such limitation. They also pointed out that the question involved in this writ petition was not involved in Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, However, the Supreme Court in the said case specifically took notice of the impugned notification including the co-operative banks within the Act and relied upon such inclusion to hold that in the absence of such a notification in respect of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, co-operative banks could not fall within the provisions of the said 1993 Act. Therefore, it was contended that the aforesaid provisions is intra vires of the Act and the notification issued under the said provision is legal and valid and do not suffer from any infirmity, and is not liable to be quashed.
The learned single judge in the impugned judgment did not notice item (v) of section 2(1)(c) and the notification issued under the said provision. All that the learned single judge has held is, a co-operative bank does not fall within a banking company as defined in section 2(1)(c)(i) and therefore, it is not a bank under the Act. In the light of the aforesaid statutory provisions, the said view is erroneous and the judgment requires to be set aside.
Points for consideration
In the light of the aforesaid facts and rival contentions, the points that arise for our consideration are as under :
(1) Whether item (v) of clause (c) of sub-section (1) of section 2 of the Act is ultra vires the Constitution.
(2) Whether the provisions of the Act, in particular, sections 13, 14, 17, 18 and 19 are applicable to co-operative banks constituted under the Karnataka Co-operative Societies Act.
(3) Whether the impugned notification dated January 28, 2003, bearing No. S. O. 105(E) issued under item (v) of clause (c) of sub-section (1) of section 2 is liable to be quashed.
Legislative heads
The legislative field in Constitutional terms has to be determined in terms of articles 245 and 246 and Entries 43, 44 and 45 of List I and Entry 32 of List II of Seventh Schedule of the Constitution of India.
Entries 43, 44, 45 of List I reads as under :
Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including co-operative societies.
Incorporation, regulation and winding up of corporations, whether trading or not, with objects not confined to one State, but not including universities.
Banking.
Entry 32 of List II reads as under :
Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities; unincorporated trading, literary, scientific, religious and other societies and associations; co-operative societies.
It is necessary to carefully see what these Entries are. Entry 43 deals with incorporation, regulation and winding up of trading corporations. It does not deal with banking as such. In the said entry, the words "including banking, insurance and financial corporations" have to be understood in the context of the opening words "incorporation, regulation and winding up", i.e., Entry 43 deals with incorporation, regulation and winding up of a banking institution, but not banking as such. Entry 43 expressly excludes co-operative societies from its purview. Similarly, Entry 44 deals with Multi State Corporations, whether trading or not confined to one State. It expressly excludes universities. It is in this context when we look at Entry 32 of List II, it deals with incorporation, regulation and winding up of corporations, other than those specified in List I and universities, unincorporated trading, literary, scientific religious and other societies and associations, co-operative societies. In other words, what is excluded in Entry 43 and 44 is included in Entry 32. Therefore, Entry 43 and Entry 44 of List I and Entry 32 of List II do not deal with banking activity as such. It is because banking finds a place as separate entry at Entry 45. Therefore in Entry 43 and Entry 44 of List I and in Entry 32 of List II, banking activity cannot be read into. Those Entries exclude banking. As pointed out by the apex court at paragraph 81 in the case of Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, if a co-operative society has a limited commercial function, then it is covered under Entry 32 of List II. If a co-operative society is carrying on commercial function without any limitation, then, it falls under Entry 45. Therefore, essentially, banking falls under Entry 45, whether the said commercial function is carried on by a co-operative society or by any nationalised bank or a banking institution.
Eleven-Judges Bench of the apex court in the case of Rustom Cavasjee Cooper Vs. Union of India (UOI), dealing with these entries and the word "banking" has held as under (page 351 of 40 Comp Cas) :
The expression ''banking'' is not defined in any Indian statute except the Banking Regulation Act, 1949. It may be recalled that by section 5(b) of that Act ''banking'' means ''the accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise''. The definition did not include other commercial activities which a banking institution may engage in ...
In modern times in India as elsewhere, to attract business, banking establishments render, and compete in rendering, a variety of miscellaneous services for their constituents. If the test for determining what ''banking'' means in the constitutional entry is any commercial activity which bankers at a given time engage in, great obscurity will be introduced in the content of that expression. The coverage of constitutional entry in a Federal Constitution which carves out a field of legislation must depend upon a more satisfactory basis.
The legislative entry in List I of the Seventh Schedule is ''banking'' and not ''banker'' or ''banks''. To include within the connotation of the expression ''banking'' in Entry 45, List I, power to legislate in respect of all commercial activities which a banker by the custom of bankers or authority of law engages in, would result in rewriting the Constitution. Investment of power to legislate on a designated topic covers all matters incidental to the topic. A legislative entry being expressed in a broad designation indicating the contour of plenary power must receive a meaning conducive to the widest amplitude, subject however to limitations inherent in the federal scheme which distributes legislative power between the Union and the constituent units. But the field of ''banking'' cannot be extended to include trading activities which, not being incidental to banking, encroach upon the substance of the entry ''trade and commerce'' in List II.
Doctrine of pith and substance
The apex court in the case of A.S. Krishna Vs. State of Madras, held as under (page 301) :
The basic assumption on which the argument of the appellants rests is that the heads of legislation set out in the several Lists are so precisely drawn as to be mutually exclusive. But then, it must be remembered that we are construing a federal Constitution. It is of the essence of such a Constitution that there should be a distribution of the legislative powers of the Federation between the Centre and the Provinces. The scheme of distribution has varied with different Constitutions, but even when the Constitution enumerates elaborately the topics on which the Centre and the States could legislate, some overlapping of, the fields of legislation is inevitable. The British North America Act, 1867, which established a federal Constitution for Canada, enumerated in sections 91 and 92 the topic on which the Dominion and the Provinces could respectively legislate. Notwithstanding that the lists were framed so as to be fairly full and comprehensive, it was not long before it was found that the topics enumerated in the two sections overlapped, and the Privy Council had time and again to pass on the constitutionality of laws made by the Dominion and Provincial Legislatures. It was in this situation that the Privy Council evolved the doctrine, that for deciding whether an impugned legislation was intra vires, regard must be had to its pith and substance. That is to say, if a statute is found in substance to relate to a topic with in the competence of the Legislature, it should be held to be intra vires, even though it might incidentally trench on topics not within its legislative competence. The extent of the encroachment on matters beyond its competence may be an element in determining whether the legislation is colourable, that is, whether in the guise of making a law on a matter within it competence, the Legislature is, in truth, making a law on a subject beyond its competence. But where that is not the position, then the fact of encroachment does not affect the vires of the law even as regards the area of encroachment.
The apex court in the case of The State of Rajasthan Vs. G. Chawla and Dr. Pohumal,
After the dictum of Lord Selbome in Queen v. Burah [1878] 3 AC 889 (PC), oft-quoted and applied, it must be held as settled that the Legislatures in our country possess plenary powers of legislation. This is so even after the division of legislative powers, subject to this that the supremacy of the legislatures is confined to the topics mentioned as Entries in the List conferring respectively powers on them. These Entries, it has been ruled on many an occasion, though meant to be mutually exclusive are sometimes not really so. They occasionally overlap, and are to be regarded as enumeratio simplex of broad categories. Where in an organic instrument such enumerated powers of legislation exist and there is a conflict between rival Lists, it is necessary to examine the impugned legislation in its pith and substance, and only if that pith and substance falls substantially within an Entry or Entries conferring legislative power, is the legislation valid, a slight transgression upon a rival List, notwithstanding. This was laid down by Gwyer C. J., in AIR 1941 47 (Federal Court) in the following words :
It must inevitably happen from time to time that legislation, though purporting to deal with a subject in one list, touches also on a subject in another list, and the different provisions of the enactment may be so closely intertwined that blind adherence to a strictly verbal interpretation would result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere. Hence the rule which has been evolved by the Judicial Committee whereby the impugned statute is examined to ascertain its "pith and substance", or its "true nature and character", for the purpose of determining whether it is legislation with respect to matters in this list or in that.
This dictum was expressly approved and applied by the Judicial Committee in AIR 1947 60 (Privy Council) and the same view has been expressed by this Court on more than one occasion. It is equally well-settled that the power to legislate on a topic of legislation carries with it the power to legislate on an ancillary matter which can be said to be reasonably included in the power given.
The apex court in the case of Bharat Hydro Power Corpn. Ltd. and Others Vs. State of Assam and Another,
In a Federal Constitution, in which there is a division of legislative powers between the Central and the Provincial Legislatures, controversies often arise as to whether one or the other Legislature is not exceeding its legislative power, and encroaching on the other''s constitutional legislative power. To resolve the dispute as to which law would prevail in a case where both the Union as well as the State Legislatures have the competence to enact laws, article 254 provides that if any provision of a law made by the Legislature of a State is repugnant to any provision of law made by Parliament, which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament shall prevail and the'' law'' made by the Legislature of the State shall to the extent of the repugnancy be void. Clause (2) provides that where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provisions repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to the matters, then, the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State.
It is likely to happen from time to time that enactment though purporting to deal with a subject in one list touches also on a subject in another list and prima facie looks as if one Legislature is impinging on the legislative field of the another Legislature. This may result in large number of statutes being declared unconstitutional because the Legislature enacting law may appear to have legislated in a field reserved for the other Legislature. To examine whether a legislation has impinged in the field of other Legislatures, in fact or in substance, or is incidental, keeping in view the true nature of the enactment, the courts have evolved the doctrine of ''pith and substance'' for the purpose of determining whether it is legislation with respect to matters in one list or the other. Where the question for determination is whether a particular law relates to a particular subject mentioned in one list or the other, the courts look into the substance of the enactment. Thus, if the substance of enactment falls within Union List then the incidental encroachment by the enactment on the State List would not make it invalid. This principle came come to be established by the Privy Council when it determined appeals from Canada or Australia involving the question of legislative competence of the federation or the States in those countries. This doctrine came to be established in India and derives its genesis from the approach adopted by the courts including the Privy Council in dealing with controversies arising in other federations. For applying the principle of ''pith and substance'' regard is to be had (i) to the enactment as a whole, (ii) to its main objects, and (iii) to the scope and effect of its provisions.
A legislative entry being expressed in a broad designation indicating the contour of plenary power must receive a meaning conducive to the widest amplitude, subject however to limitations inherent in the federal scheme which distributes legislative power between the union and the constituents unit. These Entries, though meant to be mutually exclusive are sometimes not really so. They occasionally overlap, and are to be regarded as enumeratio simplex of broad categories. It must inevitably happen from time to time that legislation though purporting to deal with a subject in one list, touches also on a subject in another list, and the different provisions of the enactment may be so closely intertwined that blind adherence to a strictly verbal interpretation would result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere. To examine whether a legislation has impinged on the field of other Legislatures, in fact or in substance, or is incidental keeping in view the true nature of the enactment, the courts have evolved the doctrine of "pith and substance" for the purpose of determining whether it is legislation with respect to matters in one list or the other; to ascertain its "pith and substance", or its "true nature and character" for the purpose of determining whether it is legislation with respect to matters in this list or in that. When in an organic instrument such enumerated powers of legislation exist and there is a conflict between rival Lists, it is necessary to examine the impugned legislation in its pith and substance, and only if that pith and substance falls substantially within an Entry or Entries conferring legislative power, is the legislation valid, a slight transgression upon a rival List, notwithstanding. If a statute is found in substance to relate to a topic within the competence of the Legislature, it should be held to be intra vires, even though it might incidentally trench on topics not within its legislative competence. The extent of the encroachment on matters beyond its competence may be an element in determining whether the legislation is colourable, that is, whether in the guise of making a law on a matter within its competence, the Legislature is, in truth, making a law on a subject beyond its competence. But, where that is not the position, then the fact of encroachment does not affect the vires of the law even as regards the area of encroachment. It is equally well-settled that the power to legislate on a topic of legislation carries with it the power to legislate on an ancillary matter which can be said to be reasonably included in the power given. The courts look into the substance of the enactment. Thus, if the substance of the enactment falls within the Union List then the incidental encroachment by the enactment on the State List would not make it invalid. For applying the principle of "pith and substance" regard is to be had :
(i) to the enactment as a whole,
(ii) to its main objects, and
(iii) to the scope and effect of its provisions.
Objects of the Act
Keeping in mind these principles let us analyse the Act.
The statement of objects and reasons for enacting the Act makes it clear that while the banking industry in India is progressively complying with international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Unlike the international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banking and financial institutions. Narasimhan Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These committees have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions, to take possession of the securities and to sell them without the intervention of the court. It is in this background, to facilitate securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities and facilitating easy transferability of financial assets by the securitisation company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of debenture and empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e., classification of the borrower''s account as non-performing asset in accordance with the directions given or guidelines issued by the Reserve Bank of India from time to time, this legislation was enacted.
Definitions
The Act defines the word "bank" at section 2(1)(c) as under :
2(1)(c) ''bank'' means--
(i) a banking company; or
(ii) a corresponding new bank; or
(ii) the State Bank of India; or
(iv) a subsidiary bank; or
(v) such other bank which the Central Government may, by notification, specify for the purposes of this Act;
"Debt" at section 2(1)(ha) as under :
(ha) ''debt'' shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);
(zd) ''secured creditor'' means any bank or financial institution or any consortium or group of banks or financial institutions and includes--
(i) debenture trustee appointed by any bank or financial institution; or
(ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the Securitisation or reconstruction, as the case may be; or
(iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;
2(1) (ze) "secured debt" is defined at (ze) as under :
"secured debt" means a debt which is secured by any security interest;
2(1) (zf) "security interest" is defined at (zf) as under :
security interest'' means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;
The Banking Regulation Act, 1949 (for short hereinafter referred to as "the B. R. Act") was enacted to consolidate and amend the law relating to banking. A comprehensive definition of "banking" so as to bring within the scope of legislation all institutions which receive deposits, repayable on demand or otherwise for lending or investment and also to control other forms of businesses which a banking company may engage, is set out in the Act. Section 3 of the Act which was substituted by Act 23 of 1965 which came into effect from March 1, 1966, made this Act applicable to co-operative societies in certain cases. Section 3 makes it clear that nothing in the B. R. Act shall apply to primary agricultural credit society; co-operative land mortgage bank; and any other co-operative society except in the manner and to the extent specified in Part V. Part V made the application of the B.R. Act to co-operative banks. Section 56 of the Act provided that the provisions of the B. R. Act shall apply to or in relation to co-operative societies as they apply to or in relation to banking companies subject to modifications provided in clause (a). After clause (cc) in section, 5, clause (cci) was introduced which defines "co-operative bank" as under :
(cci) ''co-operative bank'' means a State Co-operative Bank, a Central Co-operative Bank and a Primary Co-operative Bank.
In clause (ccv), Primary Co-operative Bank is defined as under :
(ccv) Primary Co-operative Bank means a co-operative society, other than a primary agricultural credit society--
(1) the primary object or principal business of which is the transaction of banking business;
(2) the paid-up share capital and reserves of which are not less than one lakh of rupees; and
(3) the bye-laws of which do not permit admission of any other co-operative society as a member :
Provided that this sub-clause shall not apply to the admission of a Co-operative Bank as a member by reason of such Co-operative Bank subscribing to the share capital of such co-operative society out of funds provided by the State Government for the purpose
The aforesaid provisions make it clear that the B. R. Act applies to banking company which does not include a co-operative bank or a co-operative society. However, by virtue of section 3 of the Act, the Act is made applicable to co-operative societies. Part V, section 56 of the Act makes the Act applicable to a co-operative bank, co-operative credit society, primary co-operative bank, etc., which primarily carries on the business of banking as defined under the Act.
Chapter III section 13, of the Act deals with enforcement of security interest. Section 13(1) reads as under :
Enforcement of security interest.--(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or Tribunal, by such creditor in accordance with the provisions of this Act.
(Underlining by us)
Sri Kothavale, Learned Counsel contended that the co-operative bank constituted under the Karnataka Co-operative Societies Act, is not a co-operative bank as defined under clause (cci) of the Banking Regulation Act and therefore, the Act is not applicable to a co-operative bank. If we look at the scheme of the Act, it is not intended to apply to a co-operative bank. He pointed out from sections 13, 17 and 34 and also from the definition of "debt" contained in the'' Act, that the intention was not to make applicable the Act to the co-operative bank. Secondly it was contended that even if a notification is issued under item (v) of clause (c) of sub-section (1) of section 2 of the Act by the Central Government, in view of the opening words (such other bank), such bank is to be necessarily a bank of the nature mentioned in the said provision which is essentially a public bank and therefore the notification making applicable the Act to a co-operative bank is not contemplated. Even otherwise, the said provision is too vague and as the provision exist, an unbridled power has been conferred on the Central Government to legislate to delegate, which is impermissible. He relied on the judgment of the apex court in the case of Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, and contend that the co-operative bank is not included within the definition of the banking company in the Banking Regulation Act, therefore, the said Act is not applicable.
In Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, the question that arose for consideration was the application of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, (for short hereinafter referred to as "RDB Act"), to a co-operative bank constituted under the State Co-operative Societies Act. The two question which fell for consideration in the said decision are as under :
Interpretation clause :
(a) Whether the RDB Act applies to debts due to co-operative banks constituted under the MCS Act, 1960; the MSCS Act, 2002 and the APCS Act, 1964 ?
Constitutional clause :
(b) Whether the State Legislature is competent to enact legislation in respect of co-operative societies incidentally transacting business of banking in the light of Entry 32, List II of the Seventh Schedule of the Constitution ?
(Underlining by us)
It was answered as under (page 99 of 137 Comp Cas) :
Finally, it could not be said that Amendments in Chapter V, section 56 of the RDB Act by Act No. 23 of 1965 inserting ''co-operative bank'' in clause (cci) and ''primary co-operative bank'' in clause (ccv) either expressly or by necessary intendment apply to the co-operative banks transacting business of banking ...
For the reasons stated above and adopting pervasive and meaningful interpretation of the provisions of the relevant statutes and Entries 43, 44 and 45 of List I and Entry 32 of List II of the Seventh Schedule of the Constitution, we answer the reference as under :
"Co-operative banks" established under the Maharashtra Co-operative Societies Act, 1960 (MCS Act, 1960); the Andhra Pradesh Co-operative Societies Act, 1964 (APCS Act, 1964); and the Multi-State Co-operative Societies Act, 2002 (MSCS Act, 2002) 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, 1949 (BR Act). Therefore, the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) by invoking the doctrine of incorporation are not applicable to the recovery of dues by the co-operatives from their members.
The field of co-operative societies cannot be said to have been covered by the Central Legislation by reference to Entry 45, List I of the Seventh Schedule of the Constitution. Co-operative Banks constituted under the Co-operative Societies Act enacted by the respective States would be covered by co-operative societies by Entry 32 of List II of Seventh Schedule of the Constitution of India.
In the course of judgment, the Supreme Court also dealt with the Act at paragraphs 30 and 31. It reads as under (page 83 of 137 Comp Cas) :
Parliament had enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (''the Securitisation Act'') which shall be deemed to have come into force on June 21, 2002. In section 2(d) of the Securitisation Act same meaning is given to the word ''banking company'' as is assigned to it in clause (e) of section 5 of the BR Act. Again the definition of ''banking company'' was lifted from the BR Act but while defining ''bank'', Parliament gave five meanings to it u/s 2(c) and one of which is ''banking company''. The Central Government is authorised by section 2(c) (v) of the Act to specify any other bank for the purpose of the Act. In exercise of this power, the Central Government by notification dated January 28, 2003, has specified ''co-operative bank'' as defined in section 5(cci) of the BR Act as a ''bank'' by lifting the definition of ''co-operative bank'' and ''primary co-operative bank'' respectively from section 56 clauses 5(cci) and (ccv) of Part V. Parliament has thus consistently made the meaning of ''banking company'' clear beyond doubt to mean ''a company engaged in banking, and not a co-operative society engaged in banking'' and in Act No. 23 of 1965, while amending the BR Act, it did not change the definition in section 5(c) or even in section 5(d) to include co-operative banks; on the other hand, it added a separate definition of ''co-operative bank'' in section 5(cci) and ''primary co-operative bank'' in section 5(ccv) of section 56 of Part V of the BR Act. Parliament while enacting the Securitisation Act created a residuary power in section 2(c)(v) to specify any other bank as a bank for the purpose of that Act and in fact did specify ''co-operative banks'' by notification dated January 28, 2003. The context of the interpretation clause plainly excludes the effect of a reference to banking company being construed as reference to a co-operative bank for three reasons : firstly, section 5 is an interpretation clause; secondly, substitution of ''co-operative bank'' for ''banking company'' in the definition in section 5(c) would result in an absurdity because then section 5(c) would read thus : ''co-operative bank'' means any company, which transacts the business of banking in India; thirdly, section 56(c) does define ''co-operative bank'' separately by expressly deleting/inserting clause (cci) in section 5. Parliament in its wisdom had not altered or modified the definition of ''banking company'' in section 5(c) of the BR Act by Act No. 23 of 1965.
As noticed above, ''co-operative bank'' was separately defined by the newly inserted clause (cci) and ''primary co-operative bank'' was similarly separately defined by clause (ccv). The meaning of ''banking company'' must, therefore, necessarily be strictly confined to the words used in section 5(c) of the BR Act. If the intention of Parliament was to define the ''co-operative bank'' as banking company, it would have been the easiest way for Parliament to say that ''banking company'' shall mean ''banking company'' as defined in section 5(c) and shall include ''co-operative bank'' and ''primary co-operative bank'' as inserted in clauses (cci) and (ccv) in section 5 of Act No. 23 of 1965.
As is clear from the aforesaid passage, the apex court did consider item (v) of clause (c) of sub-section (1) of section 2 of the Act and the notification dated January 28, 2003, which is impugned in these proceedings, which was also issued under the aforesaid provisions. It approved the legislative mode adopted by Parliament while enacting the Act by creating residuary power u/s 2(1)(c)(v) to specify any other bank as a bank for the purpose of the Act.
In the aforesaid judgment of the Supreme Court, at paragraph 81, it is held as under (page 103 of 137 Comp Cas) :
Hence, the co-operative banks performing functions for the public with a limited commercial function as opposed to corporate banks cannot be covered by Entry 45 of List I dealing with ''banking''.The subject of co-operative societies is not included in the Union List rather it covers under Entry 32 of List II of the Seventh Schedule appended to the Constitution.
A careful perusal of the aforesaid observation make it clear that if a co-operative bank is performing functions for the public with a limited commercial function as opposed to corporate banks, then such co-operative banks cannot be covered by Entry 45 of List I dealing with bank. However, if co-operative banks are performing functions for the public as corporate banks are performing functions, then such banks are covered by Entry 45 of List I dealing with banking. In fact, in the aforesaid judgment, the apex court was concerned with the definition of banking company as defined under the Banking Regulation Act, 1949, which did not include a co-operative bank, co-operative credit society, primary agricultural credit society, primary co-operative bank and primary credit society.
Therefore, from the aforesaid judgment of the apex court, it is clear that when the provisions of the Act is to be applied to a co-operative bank, first it has to be ascertained whether such a co-operative bank is performing functions for the public with a limited commercial functions or function performing by such co-operative banks is the function of banking for the public. If the co-operative banks are carrying on only the business of banking, for the public, then, notwithstanding the fact that it is co-operative bank, it is a bank as defined under the Act and the law made by Parliament in view of Entry 45 of List I of Schedule VII applies to such bank. It is only when a co-operative society is carrying on several activities and one such activity is a banking activity, then the case falls under Entry 32 of List II and the Act is not applicable to such co-operative society which are carrying on banking activity to a limited extent. Therefore, in view of the aforesaid discussion/ reasoning of the apex court in the case of Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, the law laid down in that case is not applicable to a co-operative bank, whose only business is banking.
In the case of RDB Act also, the definition as contained in section 2(d) of the said Act defining banks, did not include a co-operative bank. The words used therein is, a banking company. As the definition of banking company as contained in the Banking Regulation Act of 1949 and the definition of banks in the RDB Act did not include a co-operative bank, the apex court held that the field of co-operative societies cannot be said to have been covered by the Central Legislation by reference to Entry 45, List I of the Seventh Schedule of the Constitution. However, in the case of the Act, though the definition of "bank" as contained in section 2(1)(c) also includes a banking company, item (v) expressly states such other bank, which the Central Government may by notification specify for the purpose of this Act. This provision is conspicuously missing in the RDB Act. It is for that reason, in the aforesaid judgment, the apex court took note of the fact that Parliament gave five meanings to the word "bank" and the Central Government is authorised by section 2(1)(c)(v) of the Act to specify any other bank for the purpose of this Act. Further it states that in exercise of this power, the Central Government by notification dated January 28, 2003, has specified the co-operative bank as defined in section 5(cci) of the BR Act as a bank by lifting the definition of co-operative bank and primary co-operative bank respectively from section 56, section 5(cci) and (ccv) of Part V. It also noticed that Parliament thus, consciously made the meaning of banking company clear beyond doubt to mean a company engaged in banking and not a co-operative society engaged in banking and in Act No. 23 of 1965 while amending the BR Act, it did not change the definition in section 5(c) or even in section 5(d) to include co-operative banks. On the other hand, it added a separate definition of co-operative bank in section 5(cci) and primary co-operative bank in section 5(ccv) of section 56 of Part V of the BR Act. Parliament while enacting the Act created a residuary power in section 2(1)(c)(v) to specify any other bank as a bank for the purpose of that Act and in fact did specify co-operative banks by notification dated January 28, 2003. The interpretation clause plainly excludes the effect of a reference to banking company being construed or reference to a co-operative bank. Parliament in its wisdom had not altered or modified the definition of "banking company" in section 5(c) of the BR Act by Act No. 23 of 1965. However, the provisions of the B. R. Act was made applicable to co-operative societies as they apply to or in relation to banking companies subject to the modifications set out in section 3, co-operative bank is separately defined under clause (cci) of section 5. The resultant position is the "banking company" as defined u/s 5(c) of the B. R. Act, does not include a "co-operative society". However the B. R. Act is applicable to a "co-operative society" by virtue of section 56 of the Act. Therefore, the definition of bank under the Act means a banking company. Clause (d) of section 2 of the Act defines banking company and the meaning assigned to it is in terms of clause (c) of section 5 of the B. R. Act. Therefore, the word "a banking company" under item (i) of clause (c) of sub-section (1) of section 2 does not include a co-operative society. The B. R. Act is made applicable to a co-operative society by virtue of section 56. Likewise, under the Act, a residuary provision is enacted by way of item (v) of clause (c) of sub-section (1) of section 2, whereby the Central Government may by notification specify "such other bank" for the purpose of the Act. The Central Government issued a notification under the aforesaid provision which is duly published in the Gazette of India on January 28, 2003, which reads as under (see [2003] 114 Comp Cas (St.) 95) :
MINISTRY OF FINANCE AND COMPANY AFFAIRS (Department of Economic Affairs) (Banking Division)
Notification
New Delhi, the 28th January, 2003
S. O. 105(E).--In exercise of the powers conferred under item (v) of clause (c) of sub-section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), the Central Government hereby specifies ''Co-operative bank'' as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), as ''bank'' for the purpose of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
[F. No. 1/2/2002-BO-1] Shekhar Agarwal, Jt. Secy.
This in the legislative device adopted by Parliament to make applicable the provisions of the Act to the "banks" which do not fall within the ambit of item (i) to (iv) of clause (c). The words "such other" refers to the "banking institutions" and not to public bank, as contended, i.e., the institution carrying on "banking" business as defined u/s 5(b) of the B. R. Act. Similarly, the expression "such other bank" provides sufficient guidelines for the Central Government to examine its powers under the said provision and therefore it cannot be said that the power so conferred is excessive and arbitrary.
The constitutional validity of the Act was challenged before the apex court in the case of Mardia Chemicals Ltd. Vs. Union of India (UOI) and Others Etc. Etc., After considering the various aspects, the Supreme Court while upholding the validity of the Act and its provisions except that of sub-section (2) of section 17 of the Act, which was declared ultra vires of article 14 of the Constitution of India, held as under (page 417 of 120 Comp Cas) :
Under the Act in consideration, we find that before taking action a notice of 60 days is required to be given and after the measures u/s 13(4) of the Act have been taken, a mechanism has been provided u/s 17 of the Act to approach the Debts Recovery Tribunal. The above noted provisions are for the purposes of giving some reasonable protection to the borrower. Viewing the matter in the above perspective, we find what emerges from different provisions of the Act, is as follows :
Under sub-section (2) of section 13 it is incumbent upon the secured creditor to serve 60 days'' notice before proceeding to take any of the measures as provided under sub-section (4) of section 13 of the Act. After service of notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not accepting the objections, howsoever brief they may be, must be communicated to the borrower. In connection with this conclusion we have already held a discussion in the earlier part of the judgment. The reasons so communicated shall only be for the purposes of the information/knowledge of the borrower without giving rise to any right to approach the Debts Recovery Tribunal u/s 17 of the Act, at that stage.
As already discussed earlier, on measures having been taken under sub-section (4) of section 13 and before the date of sale/auction of the property it would be open for the borrower to file an appeal (petition) u/s 17 of the Act before the Debts Recovery Tribunal.
That the Tribunal in exercise of its ancillary powers shall have jurisdiction to pass any stay/interim order subject to the condition as it may deem fit and proper to impose.
In view of the discussion already held on this behalf, we find that the requirement of deposit of 75 per cent of amount claimed before entertaining an appeal (petition) u/s 17 of the Act is an oppressive, onerous and arbitrary condition against all the canons of reasonableness. Such a condition is invalid and it is liable to be struck down.
As discussed earlier in this judgment, we find that it will be open to maintain a civil suit in civil court, within the narrow scope and on the limited grounds on which they are permissible, in the matters relating to an English mortgage enforceable without intervention of the court.
A Division Bench of this Court in the case of Authorised Officer/General Manager, Sri Basaveshwar Co-operative Bank Ltd. v. Sri Balappa Fakkirappa Gurlahosur reported in ILR 2010 Karn 752, dealing with the validity of the notification bearing No. F. No. 1/2/2002-BO-I Karnataka Gazette, Extraordinary, No. 86, dated January 23, 2003, up held the aforesaid notification after following the judgment of various other High Courts.
In this background, it is clear that this Act was enacted to plug the loopholes in certain areas in which the banking and financial sector did not have level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Unlike the international banks, the banks and financial institutions in India did not have the power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banking and financial institutions. It is in this background, to facilitate securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities and facilitating easy transferability of financial assets by the securitisation company or reconstruction company; to acquire financial assets of banks and financial institutions and empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, this Act was enacted. Whether a bank is in public sector or private sector or in co-operative sector, the problem is the same. The Karnataka Co-operative Societies Act, also do not provide any machinery for similar purpose. Therefore, by virtue of the power conferred, Parliament has enacted this Act as banking falls within List I of Schedule VII. Once the constitutional validity of the enactment is upheld by the apex court in Mardia Chemicals Ltd. Vs. Union of India (UOI) and Others Etc. Etc., when the said enactment provides for an application of the said provisions to such other banks which the Central Government may by notification specify for the purposes of this Act, when the pith and substance of the enactment is to empower these banks to take possession of the securities and sell them, the power so conferred under the Act on co-operative banks is intra vires of the Act. The requirement of law is, a notification has to be issued by the Central Government u/s 2(1)(c)(v). It is not in dispute that such a notification has been issued. As aforesaid, the validity of the notification has already been up held by this Court.
Answer
In the light of the aforesaid discussion, we answer the points for consideration as under :
(1) Item (v) of clause (c) of sub-section (1) of section 2 of the Act, is intra vires of the Constitution and accordingly we uphold the constitutional validity of the said provision.
(2) All the provisions of the Act and in particular, sections 13, 14, 17, 18 and 19 of the Act are applicable to co-operative banks, constituted under the Karnataka Co-operative Societies Act, 1959.
(3) The impugned notification dated January 28, 2003, bearing No. S. O. 105(E) issued under item (v) of clause (c) of sub-section (1) of section 2 of the Act, is valid and legal.
In that view of the matter, we do not see any merit in any of the contentions urged in this writ petition. Accordingly, we pass the following order :
(a) Writ Petition No. 2755 of 2008 filed challenging the constitutional validity of section 2(1)(c)(v) of the Act is dismissed.
(b) Writ Appeal No. 2382 of 2007 challenging the order passed by the learned single judge holding that the Act is not applicable to the co-operative banks is hereby allowed, setting aside the impugned order in appeal.
(c) Consequently, all the connected writ petitions filed by the borrowers are dismissed.
(d) All the connected writ petitions filed and writ appeals filed by the creditors/co-operative banks are allowed quashing the impugned orders.
(e) However the borrowers/debtors are granted 45 days time from the date of receipt of the certified copy of the order, to file an appeal (petition) u/s 17 of the Act before the Debts Recovery Tribunal for consideration of their grievances in accordance with law.
(f) Interim order granted by this Court is continued till such an application is filed before the Debts Recovery Tribunal and thereafter for a period of six months within which time the appeal/application shall be decided on merits. If the cause for delay in disposing of the application is the borrowers/debtors, the interim order granted by this Court shall stand vacated at the expiry of six months period.
(g) All the grounds urged in this writ petition challenging the impugned notices/orders except the validity of the aforesaid provisions and the notifications, all the contentions are left open to be urged before the Debts Recovery Tribunal.
(h) In view of disposal of the writ appeals and writ petitions, all other pending I. As. or Misc. Ws. filed ''for early hearing, stay, vacating stay and dispensation do not survive for consideration and the same are dismissed accordingly.