Co-op banks can't use Sarfaesi for debt recovery: Gujarat HC

Declares the central government notification dated January 28, 2003, bringing cooperative societies within the purview of the Act, null and void

The high court here has said cooperative banks cannot use the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi), 2002, for recovery of debts from its defaulters.

A bench of Chief Justice Bhaskar Bhattacharya and J B Pardiwala, in a common judgement, today declared the central government notification dated January 28, 2003, bringing cooperative societies within the purview of the Act as null and void. They said this clashed with the Banking Regulation Act, 1949.

The bench was acting on a bunch of petitions seeking cancellation of the said notification.

Various petitioners (defaulters) had approached the HC after cooperative banks sent them notices under the Act, warning against property seizure as they had defaulted on loan payments.

The petitioners had argued Sarfaesi was not applicable to cooperative banks formed under state law, as there already was a mechanism for recovery under those legislations, in this case, the Gujarat Cooperative Societies Act, 1961.

Also, the Act was applicable to "a company engaged in banking, and not a cooperative society engaged in banking", they had said in their petitions, adding there was a conscious exclusion and deliberate omission of cooperative banks from the purview of the Banking Regulation Act.

The petitioners has also relied on observations of the Supreme Court in the case of Greater Bombay Cooperative Bank Limited v/s United Yarn Tex (Pvt) Ltd of 2007.

In that case, the applicability of central Acts to cooperative societies was dealt with, with the apex court overruling the Bombay HC.

It had said central legislation such as the Recovery of Debt Act was not applicable to cooperative societies, as there was a mechanism for recovery under the state cooperative societies Act.