Applicability Of SARFAESI Act To Co-operative Societies/Banks: SC Constitution Bench Begins Hearing

A Five Judge Constitution Bench headed by Justice Arun Mishra has commenced hearing on the question of applicability of The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 on Co-operative Societies/Banks.A three judge bench, referred this matter to constitution bench noticing the conflicting decisions in Greater Bombay Coop. Bank Ltd. vs. United Yarn Tex (P) Ltd. and others [(2007) 6 SCC 236] and the earlier pronouncements of this Court in Delhi Cloth & General Mills Co. Ltd. vs. Union of India [(1983) 4 SCC 1666], T. Velayudhan vs. Union of India [(1993) 2 SCC 582] and Union of India vs. Delhi High Court Bar Association [(2002) 4 SCC 275]. These judgments relate to the scope of the legislative fields covered by Entry 45 of List I and Entry 32 of List II of the Seventh Schedule."They excluded cooperative societies from Entry 43 (of List I). So why not from 45 (of List I)? 45 deals with banking in general. So if a cooperative society is engaging in banking activity, why can't the Central government regulate it?", asked Justice Arun Mishra."43 deals with banking corporations which are entities over which the Central government has control, the Central government has the power under the Banking Regulation Act over the exercise of banking functions...45 is banking business in general...", he was told."There is difference between the activity and the body doing the activity. Banking is the activity", observed Justice Indira Banerjee.Continuing, the Counsel indicated Entry 33 of List I in the Government of India Act, 1935, which, he advanced, was incorporated in Entries 43 and 44 of List I of the Constitution- "Corporations, that is to say, the incorporation, regulation and winding-up of trading corporations, including banking, insurance and financial corporations, but not including corporations owned or controlled by a Federated State and carrying on business only within that State or co-operative societies, and of corporations, whether trading or not, with objects not confined to one unit""There is difference in language of Entry 38 of GOI Act also- 'Banking, that is to say, the conduct of banking business by corporations other than corporations owned or controlled by a Federated State and carrying on business only within that State'...this is just banking (Entry 45)", noted Justice Banerjee.Speaking of the "pith and substance" of a legislation or any amendment in a legislation, the judge remarked, "SARFAESI is relatable to the power to control banking""In GOI, banking was narrower. Now, in the Constitution, it is wide, being only banking. It is not limited to just corporations, but any entity", added Justice Mishra."43 excludes cooperative societies but 44 includes multi-state cooperatives. (Activity) Within one state was earlier dealt with in 38, now it is taken care of in 43. There is no conflict! Any state-level activity is governed by 45 and cooperative societies by 44! Where is the question of leaving out state-level banking from the control of the Central government? There will be chaos, fraud! Entry 38 on state-level activity becomes 45", he continued."43 talks of banking corporations directly. 44 is not confined to one state. 45 is banking corporations excluding cooperative societies. When you talk of regulation of corporations, then it is confined to banking companies and banking corporations. Multi-state is in 44 and not 43", argued the Advocate.When Justice Mishra commented that the power is derived from Entry 45, the Counsel advanced, "SARFAESI doesn't talk of banking. It says Banks and Financial Institutions. So the moment the Central government says banks, it becomes entry-specific, that is, 43!""So if a cooperative bank is doing business within a state as well as outside, you are saying in case of state, there is no applicability?", questioned Justice M. R. Shah."Banking is very wide, flexible. It is not confined to one definition. Now, there is banking on the net, it was not contemplated earlier...there is Cryptocurrency, ('PayTM', observed the bench),...banking changes forms with the advent of technology, globalisation. So that entry has to be given a wider meaning", reflected Justice Mishra."You are on the entity which own the body and not on the activity carried out by it. The interpretation has to be entity-based or activity-based?", asked Justice Aniruddha Bose.Relying on the 1970 R. C. Cooper judgment, the counsel submitted, "45 is activity-based. 'banker' is in Negotiable instruments Act. SARFAESI is on banks. 45 is nothing to do with banker or banks""Banks and banking is synonymous in a sense that banks do banking and banking is done by banks. This decision implies that non-banking activities cannot be included in banking", noted Justice Bose."This judgment says other non-banking businesses done by banks and bankers will not be covered by 45", agreed Justice Shah, while Justice Vineet Saran concurred, "other commercial activities...

Applicability Of SARFAESI Act To Co-operative Societies/Banks: SC Constitution Bench Begins Hearing

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