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Judgment
S.J. Mukhopadhaya, J.—These Writ Petitions have been preferred by the borrower/guarantor, raising common question of law, pursuant to
common proceedings pending before the Debts Recovery Tribunal (for short, ''the DRT'')-I, Chennai. Therefore, they were heard together and
decided by this common order.
The borrower in these cases is NEPC Agro Foods Limited writ petitioner in W.P. No. 23660 of 2008. The lender is M/s. Janata Sahakari
Bank Limited (first respondent in W.P. No. 23660 of 2008 and second respondent in W.P. No. 9930 of 2008) (for short, ''the Co-operative
Bank''), which is registered under the provisions of the Maharashtra Co-operative Societies Act. The petitioner-Raj Kumar Khemka (in W.P. No.
9930 of 2008) is the guarantor. The respondent-Co-operative Bank, having given certain credit facilities to the borrower, it initiated proceedings
against the borrower before the Co-operative Court No. I, Mumbai and the dispute came to be dismissed by order dated 1.3.2006. Against the
said order dated 1.3.2006, the respondent-Co-operative Bank filed an appeal before the Co-operative Appellate Tribunal, which allowed the
case, by order dated 18.9.2006 and remitted the matter for fresh trial to the Co-operative Court No. I.
In the meantime, the respondent-Co-operative Bank invoked the powers u/s 13(2) of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act (for short, ''the SARFAESI Act'') and after receipt of reply/objections, dated 18.3.2006, submitted by
the borrower, being unsatisfied, the respondent-Co-operative Bank invoked Section 13(4) of the SARFAESI Act on 7.9.2006. Challenging the
said proceedings u/s 13(4), the borrower filed Securitisation Application (appeal) in S.A. No. 68 of 2008, which was originally filed in 2006, but
got numbered in 2008, view of the fact that there was some doubt as to whether the application u/s 17 of the SARFAESI Act, was maintainable
against a Co-operative Bank.
It appears that after remand by the Co-operative Appellate Tribunal, after issuance of notice u/s 13(2) of the SARFAESI Act, a consent Award
dated 15.2.2007, came to be passed by the Co-operative Court No. I, Mumbai, by which the borrower(s) agreed to pay Rs. 15,51,00,000/- as
full and final settlement of all the dues within a time, but in view of the non-payment of the full amount in terms of the said consent Award, the
respondent-Co-operative Bank proceeded with, u/s 13(2) notice, followed by the measures taken u/s 13(4) of the SARFAESI Act.
At this stage, one of the guarantors, namely Raj Kumar Khemka filed Writ Petition No. 9930 of 2008 before this Court, forbearing the
respondent-Co-operative Bank from exercising the powers under the SARFAESI Act, insofar as the loan account of the borrower-M/s.NEPC
Agro Goods is concerned. Initially, no interim order was passed and on 30.9.2008, when the Writ Petition was being heard, this Court passed the
following interim order:
During the pendency of W.P. No. 9930 of 2008, the respondents may auction-sale the mortgaged property(ies) (secured asset(s)), but will not
confirm the sale, nor take possession of the same, if not yet taken, without prior permission of the Court.
While Writ Petition No. 9930 of 2008 was pending, the respondent-Co-operative Tribunal sold the mortgaged property(ies) situated at
Hyderabad by a private treaty. It is alleged that the said sale was bad without the consent of the borrower or the owner of the property(ies) and
without following the procedures laid down under the Security Interest (Enforcement) Rules, 2002. The respondent-Co-operative Bank, having
intimated the matter relating to the sale of the property(ies) by letter dated 29.8.2008 to the borrower-M/s.NEPC Agro Foods Limited, the
second Writ Petition in W.P. No. 23660 of 2008 has been preferred by the borrower.
It is informed that Securitisation Application (appeal) u/s 17 of the SARFAESI Act in S.A. No. 68 of 2008 is still pending before D.R.T-I,
Chennai. Initially, conditional interim order was passed therein, but the same having been set aside by a Division Bench of this Court in W.P. Nos.
35427 of 2007, 5947, 5948 and 6491 of 2008, by common order dated 29.4.2008, on the ground that it was a stereo-typed order, after
remand, the DRT-I, Chennai, on hearing the parties, dismissed the petition for interim relief, on 3.6.2008, against which, appeal was preferred by
the borrower before the Debts Recovery Appellate Tribunal (for short, ''the DRAT''), Chennai, in IN. No. 489 of 2008. It is argued that in view of
the fact that S.A. No. 68 of 2008 is still pending before the DRT-I, Chennai, all the contentions available to the petitioners in both the Writ
Petitions, may be left open to be urged in the appeal (application) u/s 17 of the SARFAESI Act, in S.A. No. 68 of 2008.
Learned Senior Counsel appearing for the writ petitioners (borrower-guarantor) made the following submissions:
(i) The provisions of the SARFAESI Act do not apply to a Co-operative Bank.
(ii) Sale by a private treaty cannot be made except after the consent of all the parties. In fact, Rule 8(8) of the Security Interest (Enforcement)
Rules,, reads as follows:
Rule 8: Sale of immovable secured assets
...
(8) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing.
In regard to the first contention, learned Senior Counsel appearing for the petitioners relied on the decision of the Supreme Court in the case of
Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, ; that was a case where two questions were framed by the
Supreme Court at paragraph 69, one relating to ""interpretation clause"", viz., whether the RDB Act (i.e. Recovery of Debts Due to Banks and
Financial Institutions Act, 1993) applies to debts due to co-operative banks constituted under the MCS Act, 1960 (i.e. Maharashtra Co-operative
Societies Act), the MSCS Act, 2002 (i.e. Multi-State Co-operative Societies Act, 2002) and the APCS Act, 1964 (i.e. Andhra Pradesh Co-
operative Societies Act)? and the other relating to ""Constitutional clause"", viz., 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 ? Learned Senior Counsel appearing for the petitioners also placed reliance on paragraph 89 of the said judgment of the Supreme
Court Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt. Ltd. and Others, , which reads as follows:
In Rustom Cavasjee Cooper Vs. Union of India (UOI), this Court observed that power to legislate for setting up corporations to carry on
banking and other business and to acquire, hold and dispose of property and to provide for administration of the corporations is conferred upon
Parliament by Entries 43, 44 and 45 of the Constitution. Therefore, the express exclusion of cooperative societies in Entry 43 of List I and the
express inclusion of cooperative societies in Entry 32 of List II separately and apart from but along with corporations other than those specified in
List I and universities, clearly indicated that the constitutional scheme was designed to treat cooperative societies as institutions distinct from
corporations. Cooperative societies, incorporation, regulation and winding up are State subjects in the ambit of Entry 32 of List II of the Seventh
Schedule to the Constitution of India. Cooperatives form a specie of genus ""Corporation"" and as such cooperative societies with objects not
confined to one State are read in with the Union List as provided in Entry 44 of List I of the Seventh Schedule of the Constitution; the MSCS Act,
2002 governs such multi-State cooperatives. Hence, the cooperative 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 cooperative societies is not
included in the Union List rather it is covered under Entry 32 of List II of the Seventh Schedule appended to the Constitution.
Learned Senior Counsel appearing for the petitioners further submitted that in the light of the above observations of the Supreme Court, the
Parliament cannot enact law relating to ""co-operative societies"" and therefore, the provisions of the SARFAESI Act cannot cover the ""Co-
operative Banks"" and cannot provide for a procedure for recovery of debts by a Co-operative Bank. In other words, this power to regulate the
Co-operative Societies including the Co-operative Banks, and providing for a procedure for recovery of a debt by a Co-operative Bank, cannot
be the subject matter of a Central enactment. Consequently, the provisions of the SARFAESI Act could be read in the manner that it would
exclude its applicability to Co-operative Banks. This alone makes the SARFAESI Act ""constitutional"" insofar as it relates to the Co-operataivae
Banks.
Learned Counsel appearing on behalf of the respondent-Co-operative Bank placed reliance on the definition of the ''Bank'' in Section 2(1)(c)(v)
of the SARFAESI Act, which gives power to the Central Government to specify any other Bank by the Notification for the purpose of the Act
(SARFAESI Act). In fact, by the Notification in S.O.105(E), dated 28.1.2003, the Central Government has specified the ""Co-operative Banks
as the ''Banks'' for the purposes of the SARFAESI Act. It was further submitted by the learned Counsel appearing for the respondent-Co-
operative Bank that the said Notification u/s 2(1)(c)(v) of the SARFAESI Act having been issued on 28.1.2003, the ''Co-operative Banks'' can
also take action under the provisions of the SARFAESI Act.
In reply, learned Senior Counsel appearing for the petitioners submitted that if the Parliament itself cannot ''legislate'' on the Co-operative
Societies, including the Co-operative Banks, then the Central Government could not also issue the Notification extending the provisions of the
SARFAESI Act to the Co-operative Bank(s). The said Notification dated 28.1.2003 being an example of conditional legislation, is beyond the
jurisdiction of the Central Government. In view of this matter, according to the learned Senior Counsel appearing for the petitioners, neither the
said Notification, dated 28.1.2003, nor the definition of the ""bank"" as contained in Section 2(1)(c)(v) of the SARFAESI Act, would be of any use
to the respondent-Co-operative Bank.
Learned Counsel appearing for the respondent-Co-operative Bank placed reliance on a decision of a Division Bench of the Bombay High
Court (Aurangabad Bench) in the case of Khaja Industries Vs. State of Maharashtra and Another, , however, such judgment does not discuss the
issue in its proper perspective and the judgment of the Bombay High Court is stated to have been challenged before the Supreme Court in SLP
(Civil) No. 17573 of 2007, and interim order has also been granted by the Apex Court on 7.1.2008.
The main issue that requires for determination in the present Writ Petitions, is as to ""whether the provisions of the SARFAESI Act, would
apply to a Co-operative Bank"".
The other issue relating to the sale by a private treaty without the consent of all the parties, may not be required to be determined at this stage,
which may be determined by the DRT-I, Chennai, in S.A. No. 68 of 2008, if the first issue is decided by this Court in the affirmative.
Almost similar issue fell for consideration before the Supreme Court in the case of Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex.
Pvt. Ltd. and Others, , but that was a case in which action was taken by a Co-operative Bank under the provisions of the RDB Act and not under
the provisions of the SARFAESI Act. However, while dealing with the matter, the Supreme Court discussed the relevant provisions of the Banking
Regulation Act, 1949 (for short, ''the B.R. Act''), the SARFAESI Act, the RDB Act and other Acts.
Before discussing the observations and the findings of the Supreme Court in the said case of Greater Bombay Co-op. Bank Ltd. Vs. United
Yarn Tex. Pvt. Ltd. and Others, , it is relevant to notice and quote certain provisions of the Banking Act and the SARFAESI Act, for comparison
of the same with the RDB Act.
Section 5(c) of the B.R. Act defines ''banking company'', which reads hereunder:
5(c)''banking company'' means any company which transacts the business of banking in India;
Subsequently, instead of amending the original Clause (c) of Section 5 of the B.R. Act, a separate Clause (cci) was added in Section 5 to cover
the Co-operative Bank, to mean ""a State co-operative bank, a Central co-operative bank and a primary co-operative bank"". In the introduced
Clause (ccv) of Section 5, ""primary co-operative bank"" means ""a co-operative society, other than a primary agricultural credit society"". The above
said Clauses 5(cci) and (ccv) were noticed by the Supreme Court in the said decision Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex.
Pvt. Ltd. and Others, , wherein the Apex Court observed that the primary object or the principal business of the ""Co-operative bank"" should be
the transaction of banking business.
There is no definition of ""bank"" under the B.R. Act, though it defines the ''banking'' u/s 5(b), ''banking company'' u/s 5(c) and ''banking policy''
u/s 5(ca).
''Banking company'' has also been defined u/s 2(e) of RDB Act and Section 2(d) of the SARFAESI Act, as per which, the ''banking company''
shall have the meaning assigned to it in Clause (c) of Section 5 of the B.R Act.
On the other hand, though the ''bank'' has not been defined under the provisions of the B.R. Act, the following definition of ''the Bank'' has been
shown u/s 2(d) of the RDB Act and u/s 2(c) of the SARFAESI Act, respectively:
RDB Act: Section 2(d):
banks"" means:
(i) a banking company;
(ii) a corresponding new bank;
(iii) State Bank of India;
(iv) a subsidiary bank; or
(v) a Regional Rural Bank;
SARFAESI Act: Section 2(c):
banks"" means:
(i) a banking company; or
(ii) a corresponding new bank; or
(iii) 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;
*(The Central Government has specified ""Co-operative Banks"" as defined in Clause (cci) of Section 5 of the Banking Regulation Act, 1949 (10 of
1949) as ""bank"", vide S.O.105(E), dated 28.1.2003, published in the Gazette of India, Ext., Pt.II, Section 3(ii), dated 28.1.2003).
There is a distinction in the definition of the ''bank'' as shown in the RDB Act and the SARFAESI Act. While the first four clauses of the definition
of the ''bank'' i.e. (i) a banking company, (ii) a corresponding new bank, (iii) State Bank of India and (iv) a subsidiary bank, are common in both
the RDB Act and the SARFAESI Act, u/s 2(c)(v) of the SARFAESI Act, the Central Government had been empowered to notify such other
Bank for the purposes of the Act, and those provisions are absent in the RDB Act.
We have taken into consideration the aforesaid provisions as in the case of Greater Bombay Co-op. Bank Ltd. Vs. United Yarn Tex. Pvt.
Ltd. and Others, , while deciding the question of the applicability of the provisions of the RDB Act in regard to the Co-operative Societies, though
the Supreme Court has not decided the question of the applicability of the provisions of the SARFAESI Act in regard to the Co-operative
Societies/Banks, it discussed the relevant provisions of the B.R. Act vis-a-vis SARFAESI Act.
The relevant provisions of Section 5(cci) and 5(ccv) of the B.R. Act, as also the Notification contained in S.O. No. 105(E), dated 28.1.2003
issued by the Central Government in exercise of the powers conferred u/s 5(c)(v) of the SARFAESI Act, were noticed, but the question of validity
of Section 5(c)(v) of the SARFAESI Act has not been doubted by the Supreme Court in the said case 2007 (6) SCC 236. For this purpose, it is
necessary to quote relevant observations of the Supreme Court in the said case, as hereunder:
The Banking Regulation Act, 1949 (the BR Act)
This Act was brought into force on 16-3-1949. Section 3 of the BR Act clearly provides that the Act would apply to cooperative societies in
certain cases, subject to the provisions of Part V of the Act. The BR Act defines ""banking company"" u/s 5(c) as follows:
5.(c) ''banking company'' means any company which transacts the business of banking in India;
In Section 5(d) ""company"" means any company as defined in Section 3 of the Companies Act, 1956 (1 of 1956) and includes a foreign
company within the meaning of Section 591 of that Act.
Chapter V of the BR Act was inserted by Act 23 of 1965 w.e.f. 1-3-1966. Section 56 of the Act provides that the provisions of this Act, as
in force for the time being, shall apply to, or in relation to, banking companies subject to the following modifications, namely:
56.(a) throughout this Act, unless the context otherwise, requires,:
(i) references to a ''banking company'' or ''the company'' or ''such company'' shall be construed as references to a cooperative bank;
(ii) * * *
The purpose and object of modifications were to regulate the functioning of the cooperative banks in the matter of their business in banking. The
provisions of Section 56 itself start with the usual phrase ""unless the context otherwise requires"" is to make the regulatory machinery provided by
the BR Act to apply to cooperative banks also. The object was not to define a cooperative bank to mean a banking company, in terms of Section
5(c) of the BR Act. This is apparent from the fact that instead of amending the original Clause (c) of Section 5 separate Clause (cci) was added to
cover the ""cooperative bank"" to mean ""a State cooperative bank, a Central cooperative bank and a primary cooperative bank"". In Clause (ccv)
primary cooperative bank"" means ""a cooperative society, other than a primary agricultural credit society"". The primary object or principal business
of the ""cooperative bank"" should be the transaction of banking business.
The modifications given in Clause (a) of Section 56 are apparently suitable to make the regulatory machinery provided by the BR Act to apply
to cooperative banks also in the process of bringing the cooperative banks under the discipline of Reserve Bank of India and other authorities. A
cooperative bank shall be construed as a banking company in terms of Section 56 of the Act. This is because the various provisions for regulating
the banking companies were to be made applicable to cooperative banks also. Accordingly, Section 56 brought cooperative banks within the
machinery of the BR Act but did not amend or expand the meaning of ""banking company"" u/s 5(c). On a plain reading of every clause of Section
56 of the BR Act, it becomes clear that what is contained therein is only for the purpose of application of provisions that regulate banking
companies to cooperative societies. According to the expression ""cooperative societies"" used in Section 56 means a ""cooperative society"", the
primary object or principal business of which is the transaction of banking business. In other words, first it is a cooperative society, but carrying on
banking business having the specified paid-up share capital. Other definitions also make it clear that the entities are basically cooperative societies.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the Securitisation Act)
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 21-6-2002. In Section 2(d) of the Securitisation Act same meaning is given
to the words ""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 28-1-2003, has specified ""cooperative bank"" as defined in Section 5(cci) of the BR Act as a ""bank"" by lifting the
definition of ""cooperative bank"" and ""primary cooperative 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 cooperative
society engaged in banking"" and in Act 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 cooperative banks; on the other hand, it added a separate definition of ""cooperative bank"" in Section 5(cci) and ""primary
cooperative 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 ""cooperative banks"" by notification
dated 28-1-2003.
The context of the interpretation clause plainly excludes the effect of a reference to banking company being construed as reference to a
cooperative bank for three reasons: firstly, Section 5 is an interpretation clause; secondly, substitution of ""cooperative bank"" for ""banking
company"" in the definition in Section 5(c) would result in an absurdity because then Section 5(c) would read thus: ""cooperative bank"" means any
company, which transacts the business of banking in India; thirdly, Section 56(c) does define ""cooperative 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 23 of 1965.
As noticed above, ""cooperative bank"" was separately defined by the newly inserted Clause (cci) and ""primary cooperative 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 ""cooperative 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 ""cooperative
bank"" and ""primary cooperative bank"" as inserted in Clauses (cci) and (ccv) in Section 5 of Act 23 of 1965.
From the aforesaid findings of the Supreme Court (at paragraph 40), it will be evident that the modifications given in Clause (a) of Section 56
of B.R. Act, are to make regulatory measures provided by the B.R. Act to apply to Co-operative Banks also, in bringing the Co-operative Banks
under the discipline of the Reserve Bank of India and other authorities. A Co-operative Bank shall be construed as a ''banking company'' in terms
of Section 56 of the B.R. Act. This is because, the various provisions of regulating banking business were to be made applicable to Co-operative
Banks also.
As per the said Section 56 of the B.R. Act, though it may not be bring the Co-operative Banks within the meaning of the ''banking company'', but
that does not preclude the Central Government to bring a Co-operative Bank under the definition of ""banking"" as distinct from the ''banking
company''.
Under Entry 32 of List II (State List) of Seventh Schedule of the Constitution of India, though the ""State"" has been empowered with regard to
Co-operative Societies"", but under Entry 43 read with Entry 45 of List I (Union List) of Seventh Schedule of the Constitution of India, the Central
Government has the power of regulation in making laws with regard to ""banking"", distinct from ""banking business"". Therefore, it cannot be asserted
that the Central Government had no power to introduce Section 2(c)(v) of the SARFAESI Act, nor the Notification contained in S.O. No.
105(E), dated 28.1.2003, can be held to be unconstitutional.
We accordingly hold that ''the respondent-Co-operative Bank'' has jurisdiction to proceed u/s 13 of the SARFAESI Act, in view of Notification in
S.O. No. 105(E), dated 28.1.2003, read with Section 2(c)(v) of the SARFAESI Act and the first issue is decided accordingly.
Apart from the aforesaid facts, it is not in dispute that the petitioners have not challenged the validity of any of the aforesaid provisions; it is the
borrower-guarantor who have submitted before the DRT having moved in appeal (application) u/s 17 of the SARFAESI Act, therefore, they
cannot challenge the jurisdiction of the DRT.
We find no merits in either of the Writ Petitions, which are accordingly dismissed, but in the facts and circumstances of the cases, there shall be
no order as to costs, but give liberty to the petitioners-borrower/guarantor to raise the second issue relating to sale by a private treaty before the
DRT-I, Chennai at the time of final disposal of the appeal (application) u/s 17 of the SARFAESI Act.