Can cooperative banks resort to SARFAESI Act to recover secured debts?

Introduction

The 5-Judge Bench of Supreme Court’s (“SC”) decision in Pandurang Ganpati Chaugule v VPM Sahakari Bank Ltd, 2020 3 SCC 637(“Pandurang”) overruled the decision in the earlier case of Greater Bombay Coop Bank v United Yarn Tex Ltd, CA/6069/2005 & SLP(Crl)/2071/2006 (“United Yarn”). 

United Yarn’s Position

United Yarn dealt with the issue of whether cooperative banks can take recourse to The Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (“RDDBFI Act”) to recover their debts. This question was of significance due to several conflicting decisions of various High Courts. The 3-Judge Bench of the SC held that cooperative banks formed under the Cooperative Societies Acts promulgated by various states are excluded from the application of the RDDBFI Act. The SC observed that if Debt Recovery Tribunals, created to enable financial institutions to recover their dues without longwinded litigation, were burdened with applications filed by cooperative banks, the purpose of the RDDBFI Act would be defeated. It was also observed that cooperative banks normally had recovery mechanisms under the Cooperative Societies Acts under which they were formed. 

Pandurang’s Position

Pandurang, however, declared that cooperative banks are governed by The Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). SC held that cooperative banks can resort to the recovery mechanism prescribed by the SARFAESI Act. This is significant since borrowers can apply against securitization by filing applications in the Debt Recovery Tribunal created under the RDDBFI Act. The SC primarily considered whether the words “banking company” in Section 5(c) of the Banking Regulation Act, 1949 covers cooperative banks registered under states’ cooperative laws and multi-state cooperative societies laws. It was noted that Notification No SO/105 dated 28.01.2003 was issued by the Ministries of Finance and Company Affairs on 28 January, 2003 in exercise of power conferred under Section 2(1)(c)(v) of the SARFAESI Act specifying cooperative banks as defined  under Section 5 of the Banking Regulation Act, 1949 (“BR Act”). 

Pandurang holds that the cooperative banks are also governed by the BR Act to the extent of their banking activities. Cooperative banks cannot carry any banking activity without complying with the provisions of the BR Act and other banking laws. Therefore, cooperative banks are ‘banks’ for the purposes of the SARFAESI Act. Recovery of debt being an essential part of banking, section 13 of the SARFAESI Act would be applicable to cooperative banks.

ConclusionPandurang on the one hand, clears the hurdles which were created by United Yarn and earlier conflicting judgments and paves the way for cooperative banks to expeditiously recover their dues from defaulting borrowers without the intervention of courts. On the other hand, this may also mean that a cooperative bank would also be eligible to approach the Debts Recovery Tribunal under the RDDBFI Act which may result in an unwanted overlap of remedies under the RDDBFI Act and various state cooperative and multi-state cooperative societies legislations.

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