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Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd.

Civil Appeal · 2020 INSC 382Decided 5 May 2020
Civil Appeal No. 5674 of 2009
Justice Arun Mishra · Justice Indira Banerjee · Justice Vineet Saran · Justice M.R. Shah · Justice Aniruddha Bose

Background

This matter was a batch of dozens of connected appeals and writ petitions referred to a five-judge Constitution Bench because of conflicting earlier Supreme Court rulings on whether co-operative banks (registered under state co-operative society laws) could be treated as "banks" for the purpose of fast-track debt-recovery laws like the SARFAESI Act, 2002. Borrowers who had defaulted on loans from co-operative banks argued that co-operative societies fall exclusively under state legislative power (Entry 32, List II of the Constitution), so Parliament's SARFAESI Act, a central law, could not be used against them; the banks argued "banking" itself is a central subject (Entry 45, List I) regardless of a bank's corporate form.

Decision Breakdown

The Constitution Bench held that banking functions of co-operative banks fall under the Union's exclusive legislative power over "Banking" (Entry 45, List I), while only matters of their internal "incorporation, regulation and winding up" as societies remain with the states (Entry 32, List II). It ruled that co-operative banks engaged in banking activity qualify as "banking companies" under the Banking Regulation Act, 1949, and therefore as "banks" under the SARFAESI Act, meaning the Act's streamlined recovery procedures (including the power to seize and sell secured assets without first going to court) validly apply to both state-registered co-operative banks and multi-state co-operative banks. The Court upheld as constitutional both the 2003 government notification extending SARFAESI to co-operative banks and Parliament's 2013 amendment explicitly adding multi-state co-operative banks to the Act's definition of "bank."

Lesson Learnt

Borrowers from co-operative banks (not just large commercial banks) are subject to the same fast-track SARFAESI recovery process for secured loans: the fact that a bank is organized as a co-operative society under state law does not shield its loan-recovery powers from this central legislation.

Official source (sci.gov.in)View Judgment (PDF)

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