Section 1 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 – Applicability of Act – Whether co-operative banks established under Maharashtra Co-operative Societies Act, 1960, Andhra Pradesh Co-operative Societies Act, 1964 and Multi-State Co-operative Societies Act, 2002, transacting business of banking, do not fall within meaning of ‘banking company’ as defined in section 5(c) of Banking Regulation Act, 1949 and, therefore, provisions of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, by invoking doctrine of incorporation, are not applicable to recovery of dues by such co-operative banks from their members – Held, yes

Section 1 of the Co-operative Societies Act, 1912 – Extend of Commencement of Act – Whether field of co-operative societies cannot be said to have been covered by Central Legislation by reference to Entry 45, List I of Seventh Schedule of Constitution, rather it is covered under Entry 32, List II of Seventh Schedule – Held, yes – Whether co-operative banks constituted under Co-operative Societies Acts enacted by respective States would be covered by co-operative societies by Entry 32 of List II of Seventh Schedule – Held, yes

FACTS

A batch of twelve civil appeals and the five special leave petitions came up for consideration before the two Judges Bench of the Supreme Court. Said appeals involved an important issue regarding right of recovery of debts by co-operative banks constituted under the Co-operative Societies Acts of the States of Maharashtra and Andhra Pradesh. Under the Co-operative Societies Acts, there is a mechanism for recovery of debts by the banks constituted under those Acts, which are also called co-operative banks. After the enactment of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, question arose as to whether such co-operative banks would have right of recovery under the respective Co-operative Societies Acts or they will have to proceed under the 1993 Act. Those aspects and some other issues, including issue of legislative competence of the States to enact the provisions relating to co-operative banks, came up for consideration before the Bombay High Court and the Andhra Pradesh High Court at Hyderabad. Both the High Courts held that on and from the date on which the Debts Recovery Tribunal was constituted under the 1993 Act, the Courts and authorities under the respective Co-operative Societies Acts would cease to have jurisdiction to entertain the applications submitted by the co-operative banks for recovery of their dues. The Andhra Pradesh High Court also held that recovery of monies due to a banking institution including a co-operative bank is a matter that integrally falls within the core and substantive area of the legislative field banking in Entry 45, List-I of the Seventh Schedule of the Constitution; and that subject-matter is, therefore, excluded from the State Legislative field in Entry 32, List-II of the Seventh Schedule. Looking to the issues involved and the far-reaching consequences, which such a decision would leave, the Two Judges Bench of the Supreme Court referred the matter to the Larger Bench. Thus, following two questions arose for consideration:

(a) Whether the 1993 Act applies to debts due to co-operative banks constituted under the MCS Act, 1960, the MSCS Act, 2002 and the APCS Act, 1964? and

(b) Whether the State Legislature is competent to enact legislation in respect of co-operative societies incidentally transacting business of banking in the light of Entry 32, List II of Seventh Schedule of the Constitution?

HELD

The dues of co-operatives and recovery proceedings in connection therewith are covered by specific Acts, such as the 1960 Act and the 1964 Act, which are comprehensive and self-contained legislations. Similarly, for Multi-State Co-operatives, there is a specific enactment in the form of the 2002 Act, comprehensively providing the legal framework in respect of issues pertaining to such co-operatives. Therefore, when there is an admittedly existing legal framework specifically dealing with issues pertaining to co-operatives and especially when the co-operative banks are, in any case, not covered by the provisions of the Act specifically, there is no justification of covering the co-operative banks under the provisions of the Act by invoking the doctrine of incorporation.

The distinction between peoples’ co-operative banks serving their members and corporate banks doing commercial transactions is fundamental to the constitutional dispensation and understanding co-operative banking generally and in the context of co-operative banking not coming under the ambit of the 1949 Act. Thus, even if the co-operatives are involved in the activity of banking, which involves lending and borrowing, this is purely incidental to their main co-operative activity, which is a function in public domain.

The Recovery of Debts Due to Banks and Financial Institutions Act, was passed in 1993, when the Parliament had before it the provisions of the Banking Regulation Act, 1949 as amended by the Act No. 23 of 1965 by addition of some more clauses in section 56. The Parliament was fully aware that the provisions of the 1949 Act apply to co-operative societies as they apply to banking companies. The Parliament was also aware that the definition of ‘banking company’ in section 5(c) had not been altered by Act No. 23 of 1965 and it was kept intact, and in fact additional definitions were added by section 56(c). ‘Co-operative bank’ was separately defined by the newly inserted clause (cci) and ‘primary co-operative bank’ was similarly separately defined by clause (ccv). The Parliament was simply assigning a meaning to words; it was not incorporating or even referring to the substantive provisions of the 1949 Act. The meaning of ‘banking company’ must, therefore, necessarily be strictly confined to the words used in section 5(c) of the 1949 Act. It would have been the easiest thing for the Parliament to say that banking should mean ‘banking company’ as defined in section 5(c) and should include ‘co-operative bank’ as defined in section 5(cci) and ‘primary co-operative bank’ as defined in section 5(ccv). However, the Parliament did not do so. There was, thus, a conscious exclusion and deliberate omission of co-operative banks from the purview of the Act. The reason for excluding co-operative banks seems to be that co-operative banks have comprehensive, self-contained and less expensive remedies available to them under the State Co-operative Societies Acts of the States concerned, while other banks and financial institutions did not have such speedy remedies and they had to file suits in civil courts.

The Act was, therefore, designed to deal with other banks and financial institutions, which had to have recourse to the time-consuming process of the civil courts.

Accordingly, the burden of the civil courts in the matter of suits filed by banks and financial institutions was shifted to the Debt Recovery Tribunals. The disputes between co-operative banks and their members were being taken care of by the State Co-operative Acts and they were to remain where they were. If co-operative disputes were also to go to the Debt Recovery Tribunals, then those Tribunals would be over-burdened and the whole object of speedy recovery of debts due to banks and financial institutions would be defeated. The Co-operative Societies Acts on the one hand and the 1993 Act on the other could not be regarded as supplemental to each other viz., the provisi
ons of the said Acts could not be said to be pari materia.

Section 31 clearly refers to transfer of ‘every suit or other proceeding pending before any court’. The word ‘court’, in the context of the Act signifies ‘civil court’. It is clear that the Registrar, or an officer designated by him or an arbitrator under sections 61, 62, 70 and 71 of the Andhra Pradesh Co-operative Societies Act, 1964 and under section 91 and other provisions of Chapter IX of the Maharashtra Co-operative Societies Act, 1960 are not ‘civil courts’.

The Act is consistent with the general banks and their creditors/loanees while the 1960 Act, the 1964 Act, and the Multi-State Co-operative Societies Act, 2002 are concerned with the regulation of societies only. The language of the sections in those enactments defining ‘banking company’ is plain, clear and explicit. It does not admit any doubtful interpretation as the intention of the Legislature is clear as aforesaid. It is well-settled that the language of the statutes is to be properly understood. The usual presumption is that the Legislature does not waste its words and it does not commit a mistake. It is presumed to know the law, judicial decisions and general principles of law. The elementary rule of interpretation of the statute is that the words used in the section must be given their plain grammatical meaning. Therefore, no words can be added to read something into the section, which the Legislature had not intended.

Finally, it could not be said that Amendments in Chapter V, section 56 by Act No. 23 of 1965 inserting‘co- operative bank’ in clause (cci) and ‘primary co-operative bank’ in clause (ccv) either expressly or by intentment apply to the co-operative banks transacting business of banking.
The constitutional validity of an Act can be challenged only on two grounds, viz., (i) lack of legislative competence, and (ii) violation of any of the fundamental right guaranteed in Part III of the Constitution or of any other constitutional provision.

Power to enact a law is derived by the State Assembly from List II of the Seventh Schedule of the Constitution. Entry 32 confers upon the State Legislature the power to constitute co-operative societies. The State of Maharashtra and the State of Andhra Pradesh both had enacted the MCS Act, 1960 and the APCS Act, 1964 in exercise of the power vested in them by Entry 32 of List II of the Seventh Schedule of the Constitution. Power to enact would include the power to re-enact or validate any provision of law in the State Legislature, provided the same falls in an Entry of List II of the Seventh Schedule of the Constitution with the restriction that such enactment should not nullify a judgment of the competent Court of law. In the appeals/SLPs/ petitions filed against the judgment of the Andhra Pradesh High Court, the legislative competence of the State is involved for consideration. Judicial system has an important role to play in our body politic and has a solemn obligation to fulfil. In such circumstances, it is imperative upon the Courts, while examining the scope of legislative action, to be conscious to start with the presumption regarding the constitutional validity of the legislation. The burden of proof is upon the shoulders of the incumbent, who challenges it. It is true that it is the duty of the constitutional Courts under our Constitution to declare a law enacted by the Parliament or the State Legislature as unconstitutional when the Parliament or the State Legislature had assumed to enact a law which is void, either for want of constitutional power to enact it or because the constitutional forms or conditions have not been observed or where the law infringes the fundamental rights enshrined and guaranteed in Part III of the Constitution.

In considering the validity of a statute, the presumption is always in favour of constitutionality and the burden is upon the person who attacks it to show that there has been transgression of constitutional principles. For sustaining the constitutionality of an Act, a Court may take into consideration matters of common knowledge, reports, preamble, history of the times, objection of the legislation and all other facts which are relevant. It must always be presumed that the Legislature understands and correctly appreciates the need of its own people, and that discrimination, if any, is based on adequate grounds and considerations. It is also well-settled that the Courts will be justified in giving a liberal interpretation in order to avoid constitutional invalidity. A provision conferring very wide and expansive powers on authority can be construed in conformity with legislative intent of exercise of power within constitutional limitations. Where a statute is silent or is inarticulate, the Court would attempt to transmutate the inarticulate and adopt a construction which would lean towards constitutionality albeit without departing from the material of which the law is woven. These principles have given rise to rule of ‘reading down’ the provisions, if it becomes necessary to uphold the validity of the law.

Entry 43 of List I speaks of banking, insurance and financial corporations, etc., but expressly excludes co-operative societies from its ambit. The constitutional intendment seems to be that the co-operative movement was to be left to the States to promote and legislate upon and the banking activities of co-operative societies were also not to be touched, unless the Parliament considered it imperative. The 1949 Act deals with the regulation of the banking business. There is no provision whatsoever relating to proceedings for recovery by any bank of its dues. The recovery was initially governed by the Code of Civil Procedure by way of civil suits and after the Act came into force, the recovery of the dues of the banks and financial institutions was by filing application to the Tribunal. The Tribunal has been established with the sole object to provide speedy remedy for recovery of debts of the banks and financial institutions, since there have been considerable difficulties experienced therefor from normal remedy of civil Court.

Therefore, the express exclusion of co-operative societies in Entry 43 of List I and the express inclusion of co-operative societies in Entry 32 of List II separately and apart from that along with corporations other than those specified in List I and universities, clearly indicated that the constitutional scheme was designed to treat co-operative societies as institutions distinct from corporations. co-operative societies, incorporation, regulation and winding up are State subjects in the ambit of Entry 32 of List II of Seventh Schedule to the Constitution of India. Co-operatives form a specie of genus ‘corporation’ and as such ‘co-operative societies’ with objects is not confined to one State, read in with the Union as provided in Entry 44 of List I of the Seventh Schedule of the Constitution, MSCS Act, 2002 governs such multi-state co-operatives.

Hence, the co-operative banks performing functions for the public with a limited commercial function as opposed to corporate banks cannot be covered by Entry 45 of List I dealing with ‘banking’. The subject of co-operative societies is not included in the Union List, rather it is covered under Entry 32 of List II of Seventh Schedule appended to the Constitution.

For the reasons stated above and adopting pervasive and meaningful interpretation of the provisions of the relevant Statutes and Entries 43, 44 and 45 of List I and Entry 32 of List II of the Seventh Schedule of the Constitution, the reference was answered as under : that the ‘Co-operative banks’ established under the 1960 Act, the 1964 Act and the 2002 Act transacting the business of banking, do not fall within the meaning of ‘banking company’ as defined in section 5(c) of the 1949 Act. Therefore, the provisions of the 1993 Act, by invoking the doctrine of incorporation, are not applicable to the recovery of dues by the co-operative bank
s from their members.

The field of co-operative societies cannot be said to have been covered by the Central Legislation by reference to Entry 45 of List I of the Seventh Schedule of the Constitution. Co-operative banks constituted under the Co-operative Societies Acts enacted by the respective States would be covered by co-operative societies by Entry 32 of List II of Seventh Schedule of the Constitution of India.

S. Ganesh, Bhim Rao Naik, T.R. Andhyarujina, Shekhar Naphade, S.B. Sanyal, V.A. Bobde, Dr. N.M. Ghatate, U.U. Lalit, J.V. Suryanarayana, Dr. Rajeev Dhawan, A.V. Sawant, Raju Ramachandran, K.N. Bhatt, Siddhartha Chowdhury, Samrat Nigam, Satyajit Ghone, Y.R. Naik, Rakesh K. Sharma, Shivaji M. Jadhav, Himanshu Gupta, Brij Kishoe Sah, T.V. Ratnam, K. Subba Rao, A.H. Ramakrishna Rao, Ashish Chugh, Raghavendra S. Srivatsa, Balraj Dewan, Ms. Shweta Gupta, Abhijit P. Medh, Pramit Saxena, Ms. Anuradha Rustogi, S.V. Deshpande, T. Raja, Vinay Navare, Jay Savla, Ms. Meenakshi Ogra, Ms. Reena Bagga, Mrs. D. Bharathi Reddy, P. Vinay Kumar, Ms. Sneha Bhaskara, Sanjiv Sen, Praveen Swarup, Ms. Manik Karanawala, K. Maruthi Rao, Ms. K. Radha, Ms. Anjani Aiyagari, K. Shivraj Choudhuri, P.S. Narasimha, P. Sridhar, Avijeet Kr. Lala, Sriram P. Murthy, John Mathew, Venkatarangadas Kanur, T. Lakshminarayana, Venkateswara Rao Anumolu, I. Amer Dave, E.C. Agrawala, S. Ashokanand Kumar, S. Udaya Kumar Sagar, Ms. Bina Madhavan, (for M/s. Lawyer’s Knit & Co.), Sanjay V. Kharde, Ms. Chandan Ramamurthi, Aniruddha P. Mayee, Sanjeev Kumar Choudhary, Sanjay Visen, Amit Yadav, Satyajit A. Desai, Sunil Kumar Verma, Ms. Anagha S. Desai, S.S. Shinde, Ms. Mukti Chowdhary, V.N. Raghupathy, Ravindra Keshavrao Adsure, S. Nanda Kumar, Brij Kishore Shah, Santha Kumar, Ananda Selvam, Naresh Kumar, S.A. Desai, Kavin Gulati, Mahesh Agrawal, Rishi Agrawal, Dr. P.B. Vijaya Kumar, Ms. I. Madhavi, Saravbh Suman Sinha, B.V. Desai, Ms. Nupur Kanungo, Rahul Gupta, D. Mahesh Babu, Balraj Dewan, M.J. Paul, H.S. Parihar, Kuldeep Parihar, Amar Dave, Mehul Vakharia and Ravinder Shah for the Appearing Parties