A five-judge Constitution Bench of the Supreme Court (SC) on Tuesday ruled that all co-operative banks in the country could make use of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi) to make recovery against defaulting persons.
“We find that the SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be colourable piece or over inclusive or beyond the competence of the Parliament,” the five-judge Bench, led by Justice Arun Mishra said.
In 2013, the Gujarat High Court had, while hearing a challenge to the amendment of Banking Regulation Act of 1949, to include cooperative societies as financial institutions, ruled it null and void.
The high court had then agreed with the submissions of the petitioners who had argued that Sarfaesi would not be applicable to cooperative banks formed under the state law, as they were bound by the Gujarat Cooperative Societies Act, 1961 and could recover money only via that route.
The Delhi High Court had, on the other hand, ruled that the cooperative banks and societies were for all purposes banks and financial institutions and thus were allowed to use Sarfaesi to make recoveries against defaulters.
In its judgment on Tuesday, the apex court held that all such cooperative banks involved in the activities related to banking are covered within the meaning of ‘banking company’.
“The cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to banking,” the five-judge bench said.
While there have been calls to notify non-scheduled urban cooperative banks as ‘financial institutions’ so they could make use of IBC to recover monies, the government had clarified any institution which was owed money by any corporate could approach the NCLT either as a financial or an operational creditor.
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