Supreme Court exempts Co-Operative Banks from claiming under Recovery of Debts Due to Banks and Financial Institutions Act

The case of Greater Bombay Co-Op Bank Ltd. v. United Yarn Tex. Pvt. Ltd. and Ors., decided by a three judge bench of the Supreme Court finally settles the long-ranging debate about the interplay between Debt Recovery Tribunals and Co-operative Banks that had brought about a series of conflicting High Court decisions. The question in this case was whether the mechanism for the recovery of debt by Co-operative banks was to be in accordance with the provisions of their respective Co-operative Societies Acts, or with the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act). The matter had assumed much commercial significance as large sums of public money had been locked up in litigation due to this unresolved question.

Section 5 (c) of the Banking Regulation Act, 1949 (BR Act) defines a banking company as any company which carries out the transaction of banking in India. It is pertinent to note here that the definition of Banking Company does not include Co-operative Banks per se. However, Section 56 of the Act states that the provisions of the BR Act would apply to Co-operative Banks, unless it has been provided otherwise. The RDB Act, 1993 which provides for setting up of special Tribunals for the speedy recovery of loans by banks and other financial institutions borrows the definition of banks from Section 5(c) BR Act. Therefore, if this definition were to be construed narrowly, since it does not specifically include Co-operative Banks, the latter would not come under its ambit. However, if a broad scope is given to the definition, then Co-operative Banks would be included.

Strong legal and pragmatic arguments were addressed by both the sides. Principal contentions for excluding Co-operative Banks from the ambit of RDB Act are as follows. First, that Cooperative Banks set up under various state legislations and the Central Enactment of The Multi-State Co-Operative Societies Act, 2002 already possess effective machinery for recovery of loans of their own. Secondly, as the statement of objects and reasons in case of RDB Act provides the main aim was to speed up recovery of loans from Banks and financial institutions. Merely because cooperative societies carried out the certain functions of banking, they are not banking companies and the provisions of RDB should not be extended to them. Thirdly, it was raised that Section 56 of BR Act creates only a legal fiction by construing references to banking companies to Co-operative societies and the same should only be limited to the BR Act. Fourthly, Co-operative Banks are excluded from the specified list of banking companies under Section 2(d) of the RDB Act. Fifthly, unlike as under Section 2(c)(v) of the Securitisation Act, 2002 where the Parliament specifically by notification had brought Co-operative banks under the ambit of ‘banking companies’ by way of notification, no such notifications were issued for RDB Act.

On the contrary it was contended that the RDB Act should be construed broadly to include Co-operative Banks, as they perform essential banking functions and their business is not restricted only to the members of cooperative societies. Further the transaction of banking by cooperative banks is “patent, manifest and direct and it can neither be incidental nor ancillary”. Also, the RDB Act being a special statute dealing with recovery of loans by banking companies should have precedence over Co-operative Societies Acts which are general in their application.

The apex Court came to the conclusion that the Cooperative Societies are to be excluded from the application of RDB Act, 1993 for the following reasons. First, on the ground that the RDB Act had specifically restricted the reliance on BR Act to only Section 5(c), thereby impliedly excluding references to Co-operative Banks. Buttressing its conclusions, it remarked that co-operative banks had an alternative cheap redressal forum for recovery of loans which was absent in case of other financial institutions. Thereby, the RDB Act was specifically enacted to establish special tribunals for other financial institutions as significant amount of public money was blocked in litigation preventing its optimum utilization and “recycling of funds for the development of the country”. [About Rs 5622 crores of money belonging to public sector banks was locked up in around 304 pending cases]. Thus, the Court observed that if Debt Recovery Tribunals are further over-burdened with Co-operative Bank cases, then it will inevitably lead to defeating of the whole objective of speedy recovery of cases.

It is submitted that this judgment lays down the correct law on the twin counts of statutory interpretation, as well as pragmatic and policy implications. By a plain interpretation of the relevant provisions, reading the words as they were without alterations or modifications, the only conclusion could be that that which was not included in the provision was not meant to come within its ambit. Secondly, on the grounds of policy, given that Co-operative Banks already possessed a mechanism of their own which was performing well, there as no reason to burden DRTs, and thus defeat the purpose behind the RDB Act. Furthermore, as the Court observed, this would also facilitate the circulation of money and speed up litigation in the commercial sector, both of which are important to achieve in the context of economic development.

By Gautam Bhatia & Venugopal Mahapatra

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