The Madras High Court recently ruled that the Repatriates Cooperative Finance and Development Bank Limited (REPCO) is not a “bank” or a “secured creditor” that is eligible to invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 (SP Ganesh v. The Authorised Officer, REPCO).
The Court passed the ruling on a writ petition filed by a borrower who is stated to have failed to repay his dues to REPCO, in view of which REPCO had issued notices for taking possession of his secured assets under Section 13 of the SARFAESI Act.
The borrower, in his writ petition, contended that REPCO could not have invoked the SARFAESI Act since it is neither a bank not a secured creditor.
The Bench of Chief Justice Sanjib Banerjee and Justice Senthilkumar Ramamoorthy found merit in this contention.
“Whatever the business of the respondent (REPCO) may have blossomed to, it cannot be regarded as a bank. No banking business is undertaken in this country without obtaining a license from the Reserve Bank,” the Court held.
Pertinently, the Bench took note of the views forwarded by the Reserve Bank of India (RBI) on this issue, which submitted on affidavit that the REPCO Bank is not a bank within the meaning of the Banking Regulation Act, 1949. The RBI further submitted that:
- The RBI has not issued any banking licence to REPCO Bank;
- The REPCO was originally registered under the Madras Cooperative Societies Act, 1961 as a co-operative society;
- REPCO is deemed to be registered under the Multi-State Co-operative Societies Act, 2002 as a multi-state cooperative society;
- REPCO has not been issued a banking licence by the RBI and does not come under the regulatory purview of Reserve Bank of India;
- REPCO comes under the administrative control of the Ministry of Home Affairs, Government of India and was regulated by the Central Registrar of Co-operative Societies;
- On March 26, 2014, the RBI issued an order by which the Central Registrar instructed all multi-state co-operative societies to discontinue accepting deposits from nominal members “as this is construed as acceptance of deposits from public and carrying out banking activities.”
The REPCO, on the other hand, contended that it had been conferred the status of a bank around 1969. It was recounted that the entity was established initially to look into the rehabilitation of repatriates from then Ceylon, Burma and Vietnam. At this point, it was involved in carrying out welfare schemes to help these repatriates.
In 1982, upon the Sirima-Shastri Pact coming to an end, the REPCO stated that it entered into full-fledged financial activities to cater to the needs and rehabilitation of repatriates. In doing so, it also ventured into accepting deposits and lending loads in terms of the provisions of Multi-State Co-operative Societies Act, 2002, the Court was told.
REPCO added that it has made an application for a regular banking licence before the RBI, which is under consideration. The Court, however, noted that this would show that REPCO does not have a banking licence currently.
“Implicit in such reference is the admission that the license has not yet been granted,” the Court said.
The Court underscored that the status of the REPCO would lay in how “secured creditor” and “bank” are defined in legal provisions. On a perusal of the provisions of the SARFAESI Act, the Court opined that REPCO does not fall under the definition of a secured creditor or a bank.
“A bank is defined in Section 2(1)(c) of the Act of 2002. The respondent cannot demonstrate that it is a banking company or a corresponding new bank or State Bank or a subsidiary bank or even a multi-state co-operative bank. There is no doubt that the respondent is a multi-state co-operative society, but a multi-state co-operative society need not be a multi-state co-operative bank”, the Court said.
The Court added that the REPCO would not be a “financial institution” under Section 2(1)(m) of the SARFAESI Act either.
Moreover, a 1972 notification issued by the Centre which had allowed REPCO to continue using the word “Bank” in its name also did not play in favour of its claim to being a “bank.”
It was noted that Section 7 of the Banking Regulation Act, 1949 prohibits the use of the words “bank”, “banker”, “banking” or “banking company” by any person other than a banking company. The Court opined that the 1972 notification recognised that REPCO was not a bank, but granted an exemption.
“The use of such word “bank” did not imply that the respondent could carry on banking activities … The very fact that Section 7 came into play and the exemption was granted by the 1972 notification by the Central Government was recognition of the fact that the respondent herein did not carry-on banking business but was permitted to incorporate the word “bank” as a part of its name, nonetheless”, the Court said.
The Bench also pointed out that the same notification had prohibited REPCO from accepting deposits of money from the public.
In view of these factors, the Court quashed the notices issued by REPCO under the SARFAESI Act.
“The respondent cannot be regarded as a bank or a secured creditor within the meaning of the relevant word and expression in the Act of 2002. As a consequence, the respondent cannot resort to any of the measures indicated in the said Act, whether under Section 13 thereof or otherwise,” the Court ruled.
The Court added that REPCO may move the civil court for recovering the dues stated to be payable to it by the petitioner.
“… respondent has to carry the claim to an appropriate forum, possibly to a civil Court, and invoke Order XXXIV of the Code of Civil Procedure, 1908 that has recently gone out of fashion after bank claims have been parked with a tribunal and taken beyond the pale of the sovereign court system,” the order stated.
Advocate V Raghavachari appeared for the petitioner. Senior counsel Om Prakash and Advocate A Ilangovan appeared for REPCO. Advocate C Mohan represented the RBI.