IN THE HIGH COURT OF KERALA AT ERNAKULAM
WP(C) No. 22146 of 2007(J)
1. MR. A.P.VARGHESE, AGED 50 YEARS,
... Petitioner
Vs
1. THE KERALA STATE CO-OPERATIVE BANK
... Respondent
2. THE DEPUTY GENERAL MANAGER,
3. THE UNION OF INDIA, REPRESENTED BY
For Petitioner :SRI.SUNIL V.MOHAMMED
For Respondent :SRI.NAGARAJ NARAYANAN,SC,K.S.CO-OP BANK
The Hon'ble MR. Justice THOTTATHIL B.RADHAKRISHNAN
Dated :12/12/2007
O R D E R
THOTTATHIL B. RADHAKRISHNAN, J.
= = = = = = = = = = = = = = = = = = = = = = = =
WP(C).Nos.22146/2007-J, 29401/2007-A,
30189/2007-R, 31500/2007-Y, 31743/2007-D,
31919/2007-Y, 32228/2007-J & 32294/2007-T
= = = = = = = = = = = = = = = = = = = = = = = =
Dated this the 12th day of December, 2007.
JUDGMENT
“CR”
1.Are the Kerala State Co-operative Bank, the
District Co-operative Banks and the Urban Co-
operative Banks entitled to invoke the provisions
of the Central Act 54/2002, hereinafter referred
to as the “SARFAESI Act”? This is the issue
involved in these writ petitions.
2.Section 13(1) of the SARFAESI Act authorizes a
secured creditor to enforce a security interest,
without the intervention of the Court or
Tribunal, in accordance with the provisions of
that Act. The different clauses of Section 2(1),
forming the interpretation clause of that Act are
WP(C)22146/07 & con.cases -: 2 :-
relevant in this context. Clause (zf) defines
“security interest”. Clause (zd) defines a
“secured creditor” to mean any bank or financial
institution or any consortium or group of banks
or financial institutions in whose favour
security interest is created for due repayment,
by any borrower, of any financial assistance and
includes the different entities enumerated in
sub-clauses (i) to (iii) thereof. Clause (c)
defines a “bank” to mean, among other things,
going by sub-clause (v), such other bank which
the Central Government may, by notification,
specify for the purpose of the SARFAESI Act. The
Co-operative Banks, the rights of which are dealt
with in these writ petitions, can be banks for
the purpose of the SARFAESI Act, only if they
stand on the strength of notification in terms of
Clause (c)(v).
3.The Central Government, through the Ministry of
Finance and Company Affairs (Department of
Economic Affairs) (Banking Division), have issued
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notification dated 28-1-2003, in exercise of
powers conferred under item (v) of clause (c) of
sub-section (1) of Section 2 of the SARFAESI Act.
Thereby, the Central Government specified “Co-
operative Bank” as defined in Clause (cci) of
Section 5 of the Banking Regulation Act, 1949,
hereinafter referred to as the “BR Act” as “bank”
for the purpose of the SARFAESI Act.
4.Section 56 of the BR Act provides the
modifications for the application of that Act to
co-operative societies. Among other things, it
provides for the insertion of Clauses (cci),
(ccv) and (ccvii) in Section 5 of that Act.
5.Clause (cci) in Section 5 of the BR Act defines a
“co-operative bank” to mean a State Co-operative
Bank, a Central Co-operative Bank and a Primary
Co-operative Bank.
6.In Section 5 of the BR Act, Clause (ccvii)
states, among other things, that “Central Co-
WP(C)22146/07 & con.cases -: 4 :-
operative Bank” and “State Co-operative Banks”
shall have the meanings respectively assigned to
them in the National Bank for Agriculture and
Rural Development Act, 1981, for short, the
“NABARD Act”. “State Co-operative Bank” and
“Central Co-operative Bank” are defined,
respectively, in Clauses (u) and (d) in Section
2 of the NABARD Act. By those definitions,
“State Co-operative Bank” means the Principal Co-
operative Society in a State, the primary object
of which is the financing of other Co-operative
Societies in the State and the “Central Co-
operative Bank” means the principal Co-operative
Society in a district in a State, the primary
object of which is the financing of other Co-
operative Societies in that district.
7.The “State Co-operative Bank”, as defined in
Section 2(rb) of the Kerala Co-operative
Societies Act, 1969, hereinafter referred to as
the “KCS Act”, means an apex society having only
District Co-operative Banks as its members.
WP(C)22146/07 & con.cases -: 5 :-
“District Co-operative Bank”, as defined in
Clause (ia) of Section 2 of that Act, is a
Central Society, the principal object of which is
to raise funds to be lent to its members, with
jurisdiction over one revenue district and having
as its members any type of primary societies and
Federal and Central Societies having headquarters
in such district.
8.Therefore, the Kerala State Co-operative Bank is
a “State Co-operative Bank” as defined in the
NABARD Act and the District Co-operative Banks
are “Central Co-operative Banks” as defined in
that Act. Hence, they are “Co-operative Banks” as
defined in Section 5(cci) of the BR Act, falling
within the notification dated 28-1-2003, issued
under the SARFAESI Act.
9.By Clause (ccv) in Section 5 of the BR Act,
“Primary Co-operative Bank” means a co-operative
society other than a primary agricultural credit
society; (1) the primary object or principal
WP(C)22146/07 & con.cases -: 6 :-
business of which is the transaction of banking
business; (2) the paid-up share capital and
reserves of which are not less than one lakh of
rupees; and (3) the bye-laws of which do not
permit admission of any other Co-operative
Society as a member.
10.An “Urban Co-operative Bank”, going by Section 2
(ta) of the KCS Act, means a Society registered
under that Act and having its area of operation
in the urban areas and which undertakes banking
business. It is not the allegation of the
petitioners that the bye-laws of the Urban Co-
operative Banks permit admission of any other co-
operative society as a member or that the paid-up
share capital and reserves of those banks are
less than one lakh of rupees. Therefore, the
Urban Co-operative Banks are Primary Co-operative
Banks as defined in Clause (ccv) in Section 5 of
the BR Act and hence, Co-operative Banks as
defined in Section 5(cci) of that Act. The Urban
Co-operative Banks also, therefore, fall within
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the impugned notification.
11.On the strength of Section 80(1) of the KCS Act
and Rule 182 of the Kerala Co-operative Societies
Rules, 1969, for short, the “KCS Rules”, the
societies in the State of Kerala are classified,
according to their type and financial position,
as shown in Appendix III to KCS Rules. “Co-
operative banks”, a type of societies, according
to that classification, is further classified
into, among other things, the Apex Banks, the
Central Co-operative Banks (District Co-operative
Banks) and other Banks. The State Co-operative
Bank is an Apex Bank; the District Co-operative
Banks are the Central Co-operative Banks and the
Urban Banks fall under the category “Other
Banks”. Such statutory classification, according
to the type of the society, is, by itself,
conclusive material to hold that primary object
or principal business of the State Co-operative
Bank, the District Co-operative Banks and the
Urban Banks in the co-operative sector is the
WP(C)22146/07 & con.cases -: 8 :-
transaction of banking business.
12.In view of the aforesaid statutory materials and
in the absence of any contention for the writ
petitioners that the Kerala State Co-operative
Bank Ltd., the District Co-operative Banks and
the Urban Co-operative Banks involved in these
writ petitions are not carrying on activities in
terms of what is aforesaid, the irresistible
conclusion is that they are “co-operative banks”
for the purpose of Clause (cci) of Section 5 of
the BR Act, so modified by Clause (c) of Section
56 of that Act.
13.As a consequence, in view of the notification
issued by the Central Government on 28-1-2003
(Ext.P6 in WP(C).31919/2007), the provisions of
the SARFAESI Act are available to those
institutions, namely, the Kerala State Co-
operative Bank Ltd., the District Co-operative
Banks and the Urban Co-operative Banks, to be
invoked as enjoined by Section 13 of that Act.
WP(C)22146/07 & con.cases -: 9 :-
14.Facing the aforesaid situation emanating out of
the interpretation of the relevant statutory
provisions, the petitioners contend that the
provisions of the SARFAESI Act cannot apply to
the transactions of co-operative societies which
are governed by the provisions of the KCS Act.
They challenge the legislative competence of the
Union in that regard, by taking the stand that
“co-operative societies” is a subject included in
Entry 32 of List II, the State List, in the
Seventh Schedule to the Constitution. On such
basis, it is argued that in the absence of a
power with the Union to make a primary
legislation touching co-operative societies, the
power of the Central Government to issue a
notification in terms of Section 2(1)(c)(v) of
the SARFAESI Act, does not include the power to
notify a co-operative bank as a bank for the
purpose of that Act. The Central Government’s
notification dated 28-1-2003 is also specifically
challenged in some of these writ petitions.
WP(C)22146/07 & con.cases -: 10 :-
15.In support of the challenge, considerable
reliance is placed on the decision of the Apex
Court in Greater Bombay Co-op. Bank Ltd. v.
United Yarn Tex (P) Ltd. [2007 (3) KLT 302 (SC)],
hereinafter referred to as the “GBCB”. Reference
was also made on behalf of the petitioners to the
decision of the Apex Court in Virendra Pal Singh
v. District Assistant Registrar [(1980) 4 SCC
109] and the decision of the Bombay High Court in
Nagpur District Central Cooperative Bank Ltd. v.
Divisional Joint Registrar, Cooperative
Societies (AIR 1971 Bom. 365) laying down that
the provisions for banking activities by co-
operative societies, do not take the U.P.Co-
operative Societies Act, 1965 and Maharashtra Co-
operative Societies Act, 1960, respectively, out
of the purview of the Entry 32 in List II.
16.To insist on the precedential value of the
verdict in GBCB, reference is made on behalf of
the petitioners, to the decisions of the Apex
WP(C)22146/07 & con.cases -: 11 :-
Court in I.T.Commissioner v. Vazir Sultan & Sons
(AIR 1959 SC 814), State of U.P. v. Synthetics
and Chemicals Ltd. [(1991) 4 SCC 139] and
Municipal Corpn. of Delhi v. Gurnam Kaur [(1989)
1 SCC 101] explaining the doctrines of obiter
dicta, perincuriam and sub-silentio.
17.On to the constitutional issues raised.
18.Section 35 of the SARFAESI Act provides that the
provisions thereof shall have effect,
notwithstanding anything inconsistent therewith,
contained in any other law for the time being in
force, or any instrument having effect by virtue
of any such law. Chapter III of that Act relates
to Enforcement of Security Interest. Section 13
(1) in that Chapter provides that notwithstanding
anything contained in Section 69 or Section 69-A
of the Transfer of Property Act, 1882,
hereinafter referred to as the “TP Act”, any
security interest created in favour of any
secured creditor may be enforced, by such
WP(C)22146/07 & con.cases -: 12 :-
creditor, in accordance with the provisions of
the SARFAESI Act, without the intervention of the
Court or Tribunal. The non-obstante clause in
Section 13(1) of that Act overrides the provision
contained in Section 69 of the TP Act. Thereby,
the general law on the subject as contained in
Section 69 of the TP Act has been overridden by
the special enactment, namely, the SARFAESI Act.
This is a fundamental ground on which the
distinctions based on types of mortgages as
available in the TP Act were held to be of no
consequence, by the Apex Court in Mardia
Chemicals v. Union of India – see paragraph 42 of
that decision as reported as 2004 (2) KLT 273
(SC). “Security interest”, going by Section 2(1)
(zf) of the SARFAESI Act, means right, title and
interest of any kind whatsoever upon property,
created in favour of any secured creditor and
includes any mortgage, charge, hypothecation,
assignment other than those specified in Section
31, in terms of which, the provisions of the
SARFAESI Act shall not apply to the different
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matters enumerated in Clauses (a) to (j) therein,
including in Clause (i), any security interest
created in agricultural land. An examination of
the provisions of the SARFAESI Act, particularly
those contained in Chapter III thereof, in the
backdrop of the interpretation clause contained
in Section 2 of that Act, would show that the
said legislation is not a statute that merely
creates an alternate mode of recovery, or
provides for Courts, Tribunals or authorities
with exclusive jurisdiction and thereby changes
the forum of adjudication, unlike what has been
essentially done by the legislation of the
Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, hereinafter referred to
as the “RDB Act”. Section 2(2) of the SARFAESI
Act provides that the words and expressions used
and not defined in that Act, but defined in the
Indian Contract Act or the TP Act or the
Companies Act or the Securities and Exchange
Board of India Act shall have the same meanings
respectively assigned to them in those Acts. The
WP(C)22146/07 & con.cases -: 14 :-
right of a secured creditor created by Section 13
of the Act with the support of the overriding
effect of the SARFAESI Act provided by Section 35
thereof, is the creation of an interest in
property and not merely a modus for recovery.
The creation of that interest, which is called
“security interest”, is made by providing that
such interest shall have effect, over and above
Sections 69 and 69-A of the TP Act, which
provisions provide a right for the mortgagee to
sell the mortgaged property, without the
intervention of the Court and for appointment of
receiver in terms of the law regulating exercise
of such power, as are enjoined by those
provisions. The creation of security interest in
terms of the SARFAESI Act, can be upon “property”
which term is defined in Section 2(t) of that
Act, to mean, among other things, immovable
property and movable property. Recalling
immediately that Section 31(i) of the SARFAESI
Act provides that the provisions of that Act
shall not apply to any security interest created
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in agricultural land, it can be noticed that
transfer of property other than agricultural land
is a subject that falls in Entry 6 in List III –
Concurrent List and contracts, not including
contracts relating to agricultural land,
including the different types and forms of
contracts, fall in Entry 7 of that List. The
word “contracts” in Entry 7 uses an inclusive
mantle with an exclusionary provision relating to
agricultural land. Therefore, all contracts
including a charge, hypothecation, assignment
etc. created in favour of a secured creditor to
form a security interest in relation to property
other than those relating to agricultural land,
fall under Entry 7 in List III. The exemption
provided by Section 31(i) of the SARFAESI Act
takes that legislation away from the pale of any
accusation that the “security interest” created
thereby affects agricultural land, thereby
exceeding the legislative competence of the Union
referable to the subject at Entry 6 in the
Concurrent List. So much so, the matter dealt
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with in Section 13(1) of the SARFAESI Act read
with relevant provisions in the interpretation
clause of that statute clearly shows that those
matters fall well within the subjects at Entries
6 and 7 of the Concurrent List.
19.It is not the contention of the petitioners that
Entry 32 in List II takes within its sweep and
ambit, right to property. If that were so, the
States alone will have the exclusive competence
to legislate on matters relating to immovable and
movable properties belonging to and being dealt
with by the co-operative societies. If such a
view is possible, the TP Act cannot govern the
immovable properties belonging to the co-
operative societies. Nor would the Contract Act
apply to the co-operative societies.
20.Entries 43 and 45 in List I to the Seventh
Schedule were appreciated, qua Entry 32, in List
II, in GBCB (supra), to notice that the statutes
relating to the field of co-operative societies
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that fell for consideration provided a mechanism
under those legislations for resolution of
disputes and that therefore, any exclusion of the
jurisdiction of those authorities by the
operation of the RDB Act is constitutionally
impermissible in view of the exclusiveness given
to the fora provided by those State legislations.
In rendering that verdict, Their Lordships
appreciated a classic and nice distinction
between the provisions of the SARFAESI Act and
the RDB Act. This can be noticed on a clear
reading of the assimilation of those statutes in
paragraphs 26 to 28 of that judgment. Dealing
with the SARFAESI Act, the Apex Court noticed,
among other things, as follows:
“The Central Government is
authorised by S.2(c)(v) of the Act to
specify any other bank for the purpose of
the Act. In exercise of this power, the
Central Government by Notification dated
28-1-2003, has specified “co-operative
bank” as defined in S.5(cci) of the BR
Act as a “bank” by lifting the definition
WP(C)22146/07 & con.cases -: 18 :-
of ‘co-operative bank’ and ‘primary co-
operative bank’ respectively from S.56
Clauses 5(cci) and (ccv) of Part V. The
Parliament has thus consistently made the
meaning of ‘banking company’ clear beyond
doubt to mean ‘a company engaged in
banking, and not a co-operative society
engaged in banking’ and in Act No.23 of
1965, while amending the BR Act, it did
not change the definition in S.5(c) or
even in 5(d) to include co-operative
banks; on the other hand, it added a
separate definition of ‘co-operative
bank’ in S.5(cci) and ‘primary co-
operative bank’ in S.5(ccv) of S.56 of
Part V of the BR Act. Parliament while
enacting the Securitisation Act created a
residuary power in S.2(c)(v) to specify
any other bank as a bank for the purpose
of that Act and in fact did specify ‘co-
operative banks’ by Notification dated
28-1-2003.”
21.Bearing in mind, one of the crucial
distinctions, to wit, that the SARFAESI Act
provides a residuary power to the Central
Government to notify any other bank as a “bank”
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for the purpose of that Act, the absence of such
a provision in the RDB Act would go a long way in
coming to the conclusion that the decision in
GBCB is not of much avail in favour of the
petitioners to accept their contention that the
said judgment is applicable to hold that the
provisions of the SARFAESI Act do not apply to
the co-operative societies. In support, I may
also refer to the decision of this Court in WP
(C).No.26110 of 2007, distinguishing GBCB.
22.In dealing with Question No.1 therein, Their
Lordships noticed in GBCB, that there exists a
legal framework that specifically dealt with the
issues pertaining to co-operatives and there was
no reason or justification for covering the co-
operative banks under the provisions of the RDB
Act. The provisions under the co-operative
societies law, including the KCS Act, in so far
as they relate to resolution of disputes and
recovery of amounts, are provisions which provide
forum for adjudication and are not provisions
WP(C)22146/07 & con.cases -: 20 :-
which create, by themselves, any statutory right
relating to property. The provisions of the RDB
Act are also those which create an alternate
forum, intended to provide a quicker mode of
recovery, by substituting the Tribunals
constituted under that Act for the civil Courts.
That necessary fall out, was in tune with the
needs of the changing times. The RDB Act does
not provide the creation of any interest like
security interest as is created by the SARFAESI
Act.
23.The legislative competence as regards SARFAESI
Act falls easily within Entries 6 and 7 of List
III and thereby within the competence of the
Union, even as regards the co-operative banks.
The impugned notification, issued by the Central
Government, therefore, stands.
For the aforesaid reasons, the issues regarding
the applicability of SARFAESI Act to the Kerala
State Co-operative Bank, the District Co-
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operative Banks and the Urban Co-operative Banks
and the validity of notification dated 28-1-2003
issued by the Central Government, in exercise of
power under Section 2(1)(c)(v) of the SARFAESI
Act, are answered against the petitioners and
these writ petitions are dismissed, preserving
the right of the petitioners for appropriate
statutory remedies in terms of the provisions in
the SARFAESI Act. No costs.
THOTTATHIL B. RADHAKRISHNAN,
JUDGE.
Sha/