Do Cooperative Societies Fall Under the SARFAESI Act?

In the complex world of Indian financial law, questions about jurisdiction often arise, especially for entities like cooperative societies. A common query is: Do cooperative societies come under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)? This issue pits central banking regulations against state cooperative laws, with significant implications for debt recovery.

This blog post breaks down the legal position, drawing from landmark judgments and statutory provisions. Note that this is general information based on established precedents and should not be taken as specific legal advice. Consult a qualified lawyer for your situation.

Main Legal Finding: Cooperative Banks Yes, Pure Societies No

Generally, cooperative societies engaged in banking—known as cooperative banks—are covered under the SARFAESI Act for recovering dues, a core banking function under Entry 45 of List I, Seventh Schedule to the Constitution. This stems from Section 2(1)(c) of the SARFAESI Act, notifications specifying cooperative banks, and Section 56(a) of the Banking Regulation Act, 1949 (BR Act), which subjects their banking operations to central laws despite state oversight of incorporation under Entry 32 of List II2020 0 Supreme(SC) 358.

Pure cooperative societies not involved in banking do not fall under the SARFAESI Act. For instance, state cooperative laws like the Maharashtra Cooperative Societies Act govern non-banking aspects such as management and winding up 2020 0 Supreme(SC) 358.

Key Points on Applicability

• Cooperative banks qualify as 'banks' under SARFAESI Section 2(1)(c) through BR Act definitions and notifications, allowing enforcement under Section 13 for dues recovery 2020 0 Supreme(SC) 358.
• Banking activities, including recovery, fall under Parliament's domain (Entry 45, List I), separate from state powers over cooperative incorporation (Entry 32, List II) 2020 0 Supreme(SC) 358.
• Debt Recovery Tribunal (DRT) has exclusive jurisdiction over SARFAESI proceedings involving cooperative banks, barring civil or cooperative courts under Sections 34-352010 0 Supreme(Bom) 1750.

Detailed Analysis: Legislative Competence and Pith and Substance

The SARFAESI Act's validity for cooperative banks hinges on the pith and substance doctrine. Recovery is integral to banking (Entry 45, List I), not encroaching on state cooperative regulation (Entry 32, List II). As held: The concept of regulating non-banking affairs of society and regulating the banking business of society are two different aspects and are covered under different Entries, i.e., Entry 32 of List II and Entry 45 of List I, respectively. The law dealing with regulation of banking is traceable to Entry 45 of List I and only the Parliament is competent to legislate. 2020 0 Supreme(SC) 358

This distinguishes cases like service regulations upheld as incidental under state lists, affirming SARFAESI's application 2020 0 Supreme(SC) 358. State acts, such as the U.P. Cooperative Societies Act or Kerala Co-operative Societies Act, handle incorporation and disputes like elections or inspections by Registrars

SMT SHIVAMMA vs THE STATE OF KARNATAKA

Definitions: How Cooperative Banks Fit In

Under SARFAESI Section 2(1)(c), 'bank' includes 'banking company' from BR Act Section 5(c) via Section 56(a), deeming cooperative banks as such. The term ‘bank’ has been defined in Section 2(1)(c) to mean ‘banking company’... Thus, the definition of ‘banking company’ stands incorporated in Section 2(1)(d) of the SARFAESI Act... Section 56(a) becomes part of Section 5(c). 2020 0 Supreme(SC) 358

Krishna Trading Company VS Vyavisayik Evam Audhyogik Sahakari Bank Ltd. - Madhya Pradesh (2012)

The Central Government notified cooperative banks under Section 2(1)(c)(v): The Central Government in exercise of powers... u/s 2(1)(c)(v) of the Securitization Act has issued the aforesaid notification...

Krishna Trading Company VS Vyavisayik Evam Audhyogik Sahakari Bank Ltd. - Madhya Pradesh (2012)

Jurisdiction: DRT Takes Precedence

SARFAESI Sections 34-35 oust other courts: No Civil Court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debt Recovery Tribunal... is empowered... Section 35... shall override other laws. 2010 0 Supreme(Bom) 1750. Cooperative courts lack jurisdiction, even for post-notice fraud claims.

Contrast with Greater Bombay Coop. Bank on RDDB Act, where coops were excluded for member recoveries, but SARFAESI's notification overrides this 2015 0 Supreme(Guj) 950. State Registrars handle administrative matters like elections or records under acts like Tamil Nadu Societies Registration Act, but not SARFAESI dues 2007 0 Supreme(Mad) 1665.

Distinction from Non-Banking Cooperatives

Non-banking cooperatives remain under state laws. For example, primary milk producers or spinning mills disputes go to Registrars or state forums 2007 0 Supreme(AP) 505 1997 0 Supreme(AP) 1299. State acts like U.P./Maharashtra Cooperative Societies Acts govern non-banking aspects (e.g., management under Sections 28-35), but banking/recovery shifts to central laws. 2020 0 Supreme(SC) 358 1980 0 Supreme(SC) 250

Societies Registration Act covers charitable or religious groups, but banking elevates them to central regulation 2019 0 Supreme(All) 338 1999 2 Supreme 107.

Exceptions and Limitations

• Applies only to cooperative banks (primary, central, apex doing banking); excludes non-banking societies.
• Notification dated 28.01.2003 upheld; multi-state banks added via amendments

  Krishna Trading Company VS Vyavisayik Evam Audhyogik Sahakari Bank Ltd. - Madhya Pradesh (2012)

  .
• Pre-SARFAESI remedies (e.g., Registrar under state acts) for non-banking issues, but SARFAESI prevails for dues

  J.p.mishra vs State Of Chhattisgarh

  .
• RDDB Act differs (no coop incorporation), but SARFAESI uses direct notification 2015 0 Supreme(Guj) 950.

Practical Recommendations

Cooperative banks should invoke SARFAESI Section 13 for recovery; aggrieved parties appeal to DRT under Section 17. Verify bank status under BR Act Section 56 and notifications. Challenges to notifications rarely succeed post-Pandurang2021 0 Supreme(Cal) 336. Non-banking disputes? Approach cooperative forums.

Key Takeaways

• Cooperative banks: Yes to SARFAESI for banking/recovery.
• Pure cooperatives: No, state laws apply.
• Jurisdiction: DRT exclusive; overrides state courts.
• Central banking laws prevail over state incorporation rules via pith and substance.

Understanding this balance helps navigate debt recovery efficiently. For tailored guidance, seek professional legal counsel.

References

1. 2020 0 Supreme(SC) 358: Core on SARFAESI for coop banks.
2. 2021 0 Supreme(Cal) 336: Pandurang Ganapati Chaugule ruling.

3. Krishna Trading Company VS Vyavisayik Evam Audhyogik Sahakari Bank Ltd. - Madhya Pradesh (2012)

   : Notification on coop banks.
4. 2010 0 Supreme(Bom) 1750: DRT jurisdiction.
5. 2015 0 Supreme(Guj) 950: RDDB contrast.
6. 1980 0 Supreme(SC) 250: State vs. central competence.