Deepak Yadav, Law Centre- II, Faculty of Law, University of Delhi

Purbasha Mukherjee, Jogesh Chandra Chaudhuri Law College, Calcutta University


Varun Hinge, Institute of Law, Nirma University


The SARFAESI Act, 2002 was passed as a supportive legislation for the Debt Recovery laws and to give Banks and Financial Institutions (secured Creditors) more liberty while recovering the Bad Debts which RDDBFI lacked and by proper analysis it can be said that when a debtor defaults a payment and the Banks shows that Debtor in Non-Performing Asset in their accounts, it gives a right to the Banks to move forward with Section 13 of the act which deals with the enforcement of the Security Interest by the Secured Creditors after serving notice to the parties to discharge their liabilities or debts within a span of 60 days, failing which the Banks and Institutions are empowered to Auction Residential or Commercial properties that has been pledged with the Banks as a security to recover loans from borrowers.


The Central Government enacted Enforcement of Security Deposit and Debts law Amendment Act which amended the definition of “Bank” in the Banking Regulation Act, 1949, for the SARFAESI Act[1]. Pandurang the appellant, questioned the actions of the Vishwasrao Patil Murugud Sahakari Bank Limited under the SARFAESI Act and as the matter was pending in the Court of law, the Central Government enacted Enforcement of Security Deposit and Debts law Amendment act which amended the definition of the Bank in the Banking Regulation Act, 1949, for SARFAESI Act. Also, amendments were made in SARFAESI Act for incorporating multistate cooperative bank in SARFAESI Act.[2] The apex Court framed four issues for the interpretation which are:

1. Whether the co-operative banks are governed by Entry 45 of Union List or by Entry 32 of State list of the seventh schedule of the constitution.

2. Whether the “Banking Company” defined in the Banking Regulations Act covers Cooperative Banks which are registered in the State cooperative laws and multistate cooperative societies.

3. Does section 5(c) of the BR Act, 1949, covers state and multi-state level cooperative banks and societies?

4. Can cooperative banks at state and multi-state level apply the SARFAESI act?


Courts view on question 1

It was argued that, as Banking being the core activity falls under the Union list and the Cooperative societies are covered under the State list, the actions taken by the Central legislature is colorable legislation and the Union does not have power to issue notification against it. And also, because the very essence of banking doesn’t only include the transactions process, and there lies a difference between cooperative societies and the cooperative banks as well, the apex court ruled that mere involvement in the financing activity does not give the entities the title of being the banks. The term “Banking” which has been used in Entry 45 of Union list, came up for assessment before the apex court and it was held that ‘Banking’ has never had any static meaning and the only meaning will be the mutual understanding between public and the established practice about banking.[3]

The apex Court also ruled that, as the recovery of dues is an essential function of any banking institution, the parliament can enact legislation under Entry 45 of Union list. Further, the difference was also provided and the Court, using doctrine of Harmonious Construction, stated that incorporation, regulation and the winding up of the cooperative societies falls under Entry 32 of State list whereas banking activity of such cooperative society would fall under Entry 45 of Union List.

Courts View on Question 2

The court is of the view that as the cooperative banks are run by the cooperative societies, the banks cannot operate without complying to the provision 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.

Courts View on Question 3

The apex court ruled that the SARFAESI Act is applicable for the co-operative banks and societies, both state and multi-state levels, for recovering their debts. The Act defines ‘banking company’ as any company which basically operates a banking business and any corresponding new bank or a subsidiary bank or a multi­-State co­operative bank or such other banks are included under the Act and the Court ruled that the cooperative banks come under the scope of the Act because these banks perform commercial functions just like other banks and also deposits and accepts money from the public which are withdrawable by cheque, drafts and order or reimbursable on demand and just because money lending is only available for members, they cannot be put out of the scope of banking. However, the Court couldn’t use the same provisions because it did not apply to cooperative banks as per se, so they a found a middle ground and read the section 56(a) as ‘banking company’ rather than ‘the company’ or ‘such company’ to make it applicable for cooperative banks. In Greater Bombay Bank Ltd v. United Yarn Tex (P) Ltd[4], the Court opined that the BR Act, 1949, applies to co-­operative banks and thus the Act shall apply in cases concerning cooperative banks for recovering debts.

Courts View on Question 4

The activity of cooperative banks are banking which is regulated by the law enacted within Entry 45 of List I and so the court observed that the purpose of the SARFAESI Act was met and also found no reason as to why the Parliament lacked the competence to enact the Act and to provide a procedure for the speedy recovery of dues when the Parliament had the power to enact such a provision and thus, came to the decision that the SARFAESI Act also covers the activities undertaken by the cooperative banks and is not ultravires to the constitution. The Court brought up the judgment in KC Gajapati Narayan Deo v. State of Orissa[5] where it was held that the substance of the SARFAESI Act is material and if the subject matter in substance is beyond the powers of legislature, then it would be condemned as violation of the constitution.


The Supreme Court through this landmark judgement tried to uphold the view that co-operative banks and societies come under the objective and scope of the SARFAESI Act for recovery of debts. The Court also tried to establish its position in law by bringing up the fact that even though some of the functions of co-operative bank come under the scope of Entry 32 of State List under Schedule VII, ultimately the Government has the power to legislate for co-operative societies undertaking banking and carrying out banking business, under Entry 45 of Union List. The five judges constitution bench also stated that RBI has a ‘deep and pervasive’ control over the primary credit society which is involved in banking and this control is much more than a mere regulatory and supervisory one and thus, the Court modified some definitions under the existing section to incorporate cooperative banks under the SARFAESI Act and set aside other judgements that didn’t include them in the Act. Therefore, co-operative societies undertaking core banking activities can seek recourse under the SARFAESI Act for recovery of dues from the borrower was held as the final judgement.

[1] Notification no. 105(E) dated 28 January 2003 [2] Enforcement of Security Interest and Recovery of Debt Laws( Amendment) Act, 2012 [3] Rustom Cavasjee Cooper v. Union of India (1970) 1 SCC 248 [4] (2007) 6 SCC 236 [5] AIR 1953 SC 375

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