Sarfaesi Act Applicable To Cooperative Banks, Rules Supreme Court

A five-judge constitution bench of the Supreme Court of India today ruled that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, will be applicable to state and multi-state cooperative banks.

The ruling by a bench headed by Justice Arun Mishra came in a case that challenged the Parliament's decision to amend Section 2(c) of the Sarfaesi Act—which allows banks and financial institutions to seize and auction properties of defaulters to recover their dues—and include cooperative banks among those who can exercise powers under the Act.

With this judgment, state and multi-state cooperative banking societies can now seize and sell assets to recover their dues. The top court bench in its judgment also held that state and multi-state cooperative banks will fall under the definition of banks under the provisions of the Banking Regulation Act.

“The cooperative banks under the state legislation and multi-state cooperative banks are ‘banks' under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,” the judgment said. “The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, a legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.”

The case had been referred to the constitution bench after earlier conflicting 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.

In today's judgment, the top court upheld the 2003 notification which brought co-operative banks under the ambit of banks entitled to seek recourse under the Sarfaesi Act.

Prior to this, cooperative banks had to approach civil court or tribunals for recovery of dues. The Sarfaesi Act brought a procedure through which recoveries could be made by banks without the intervention of the court/tribunal.

The apex court's judgment notes that the aim behind this move was to remove the delays caused by going through the civil court or summary procedure under the Cooperative Societies Act.

“It's permissible for the Parliament to enact the law to provide recovery procedures for bank dues that have been done by providing speedy recovery of secured interest without intervention of the court/tribunal,” it said.

The other judges on the bench that delivered today's judgment include Justice Indira Banerjee, Justice Vineet Saran, Justice MR Shah and Justice Aniruddha Bose.