Supreme Court SARFAESI Act Applicable To Cooperative Banks

This article discusses the recent Supreme Court judgment on the SARFAESI Act’s applicability on cooperative banks in India. The legal position regarding this was unclear before this judgment. This clarification will now help in quicker recovery of loans and debts for cooperative banks, who earlier struggled with litigation in Civil Courts and Tribunals.

Wed Jun 22 2022 | Business Law | Comments (0)

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An insight into SARFAESI 2002

The objective of the SARFAESI Act was to regulate securitization and to provide reconstruction of financial assets whereby , the Banks and financial institutions can enforce, expeditiously, their security interests without being required to move to a court or the tribunal. The Act was enacted to provide all the banks and financial institutions a chance to realize their assets, manage glitches of liquidity, asset liability discrepancies and improve recovery from their NPAs.  Under this Act, the Banks are able to exercise powers by taking possession of securities, selling them and thereby reducing non- performing assets, by resorting to measures for recovery or reconstruction under the Act. The main intention of the Act was to cover up all the dealings of loans already entered into, subject to the provisions and within the period of limitation and the failure in making repayment and the debts already grouped as non-performing assets and such future contingencies too.

The most imperative section under the Sarfaesi Act is section 13(2), as it postulates  that a borrower, under a liability to a secured creditor and thereafter, marks any default in repayment of the said secured debt, thereby classifying  his account as a non-performing asset, then the secured creditor can give the borrower a notice in writing to clear his liability within sixty days from the date of notice with a  warning that if he fails to pay the loan, the secured creditor can exercise all or any of its rights in terms of section 13(4) of the Act, in terms of taking possession over the secured asset.

Position as regards Co-operative banks

Prior to May 2020, the position was really never clear, as to whether co-operative banks could commence action against borrowers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Before the landmark judgment, Co-operative Banks had to initiate Civil Court recovery suits for their NPAs. The subject was referred to the Supreme Court Constitution Bench in 2016, regarding a  question of law on the applicability of the 2002 Act in the co-operative banking sector. The said reference has been answered this year in May 2020.

The subject case was referred to the Constitution Bench after differing decisions on this issue emerged in the cases of Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd and Union of India and Anr. v. Delhi High Court Bar Association. After a lot of debate, in May 2020, a five Judge Constitution Bench headed by Justice Arun Mishra ruled that SARFAESI 2002 applies even to Co-operative Banks. The Judgement spelt out that co-operative banks come under the category of banks under section 2(1)  (c) of the SARFAESI Act and the recovery procedure mandated under the said Act would be applicable to these banks too. The argument advanced that the 2013 amendment to the SARFAESI Act adding multi-state co-operative banks to Section 2(1)(c)(iva) was a "colourable exercise of power" was dismissed by the Bench.

The said judgment was of very significant and substantial and gained a lot of importance, especially if the said co-operative bank was not multi-state. The judgment also states that co-operative banks registered under state-specific acts and multi-state  level cooperative  societies registered under the Multi  State Cooperative Societies Act, 2002 concerning 'banking' are governed by the legislation relatable to Entry 45 of List I of the 7th Schedule. The Judgment set out in cooperative  banks involved in the activities related to banking are covered within the meaning of 'Banking Company' defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of cooperative  banks run by the cooperative  societies.  The cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking' in Entry 45 of List I and the RBI Act relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.

Thus, with this landmark ruling the SARFAESI Act was made applicable to co-operative banks and they can also pursue recoveries of long pending dues and reduce the non-performing assets (NPAs). In the wake of this judgment, state and multi-state cooperative banking societies can now confiscate and sell assets to recover their long pending dues.

Way Ahead:

The Judgment has curbed the problems and difficulties faced by these banks because of unwarranted delay in recovery of dues through civil courts and co-operative tribunals, that have very cumbersome and long drawn procedures for recovery. Hence, this judgment declaring that the co-operative banks are under the purview of the SARFAESI Act, will catapult the recovery of loans by these banks.

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