Pandurang Ganpati Chaugule: Co-operative Banks and SARFAESI

Could a co-operative bank use SARFAESI, or did the fact that co-operative societies fall under the State List put them beyond a central recovery law? For years the answer was contested. A Constitution Bench settled it in Pandurang Ganpati Chaugule, holding that co-operative banks engaged in banking fall within the Act because banking is a Union List subject. This note sets out the question, the holding, and its significance.

1. The Question

Figure 1: Are co-operative banks within the Act?

• The question. Are co-operative banks banks that may invoke SARFAESI, and did Parliament have the competence to bring them in?
• The competence doubt. Co-operative societies fall under the State List, so it was argued that bringing co-operative banks within a central recovery law was beyond Parliament.
• Why it mattered. If co-operative banks were outside the Act, a large class of lenders could not use its speedy enforcement machinery (Topic 10)

2. The Holding

Figure 2: Banking is a Union List subject

• A Constitution Bench ruling. In Pandurang Ganpati Chaugule v Vishwasrao Patil (2020) a five-judge Bench held co-operative banks fall within SARFAESI.
• Banking is Entry 45, List I. The activity of banking relates to Entry 45 of the Union List, so a central law may regulate banking by co-operative banks.
• Recovery is ancillary to banking. Recovery of dues is an essential part of banking, so providing a recovery mechanism is within the field of banking, not co-operative societies.
• The notification is valid. The notification bringing co-operative banks within the definition of bank was upheld, so they may enforce under the Act (Topic 2)

3. The Significance

Figure 3: A settled, wide reach

• Years of doubt settled. The Bench resolved long-standing conflict over whether co-operative banks could use SARFAESI, which had divided the High Courts.
• Co-operative banks can enforce. Multi-state and state co-operative banks engaged in banking may invoke the Act, like scheduled commercial banks.
• The Act's wide reach. The decision confirms the Act reaches the full range of banking institutions, consistent with the wide list of secured creditors (Topic 10)
• A constitutional footing. By grounding the applicability in Entry 45, the Court gave the result a firm constitutional footing, not merely a reading of the definition.

4. Frequently Asked Questions

Can a co-operative bank invoke the SARFAESI Act?

Yes. In Pandurang Ganpati Chaugule v Vishwasrao Patil Murgud Sahakari Bank (2020), a Constitution Bench of the Supreme Court held that co-operative banks engaged in the business of banking fall within the SARFAESI Act and may invoke its enforcement machinery. The Court reasoned that the activity of banking relates to Entry 45 of the Union List, and that the recovery of dues is an essential part of banking, so a central law may regulate banking by co-operative banks without trenching on the State List subject of co-operative societies. The notification bringing co-operative banks within the definition of a bank under the Act was upheld, so multi-state and state co-operative banks can enforce under SARFAESI.

Why was there doubt about co-operative banks using SARFAESI?

The doubt arose because co-operative societies fall under the State List of the Constitution, and it was argued that bringing co-operative banks within a central recovery law exceeded Parliament's competence and encroached on the States' field. Different High Courts had taken different views, leaving the position unsettled. The Constitution Bench in Pandurang Ganpati Chaugule resolved the conflict by distinguishing between the entity, a co-operative society, and the activity, banking. Banking relates to Entry 45 of the Union List, and because recovery is an essential part of banking, Parliament was competent to provide co-operative banks with the SARFAESI remedy. The applicability therefore rests on a firm constitutional footing.

5. Related Topics

• Topic 10: Secured Creditor and Secured Asset. Who qualifies to invoke the Act.
• Topic 2: History and Evolution of SARFAESI. The notification route for co-operative banks.