Friday, April 3, 2009


In an earlier post, it was reported that the Supreme Court had excluded cooperative societies from the purview of the RDB Act (Debt Recovery Tribunals). Recently, similar questions have been raised about the scope of the Securitization Act, 2002, and whether it covers co-operative societies.

Unlike the RDB Act, which did not specifically include Co-operative Societies or delegate power to the Central Government to do so, the Securitization Act specifically confers power on the Central Government to bring any other institution under the ambit of Securitization Act. The Central Government, through a notification issued in 2003, included cooperative societies under the Act.

This notification was challenged on several grounds before the Bombay High Court in Khaja Industries v. State of Maharastra. However, the Court concluded that the Central Government had acted within its legislative competence in declaring that cooperative societies come under the Securitization Act. The Court observed that banking is an activity which is within the exclusive competence of the Parliament. Furthermore, the Securitization Act, in pith and substance, deals with banking. Therefore, even though cooperative societies are within the exclusive legislative competence of the State, any banking matters concerning cooperative societies would still come under the legislative domain of the Parliament. On these grounds, the Court upheld the validity of the notification.

The holding of the Bombay High Court raises further complications. Section 17 of the Securitization Act allows sole recourse against the actions undertaken by the financial institution under Section 13 before the Debt Recovery Tribunal. Therefore, if cooperative societies are included under the Act, then relief against their actions will also be before the Debt Recovery Tribunal. This seems to be in conflict with the ruling of the Supreme Court in Great Offshore in which it was expressly held that the doors of the Debt Recovery tribunal are closed for cooperative societies.

Dealing with this apparent conflict, the Bombay High Court drew a fine distinction between the acts of a borrower challenging the actions of a financial institution (Cooperative society) under Section 17 and a financial institution (Cooperative society) initiating proceedings against the borrower for recovery of dues. It observed that while the former can be before the Debt Recovery Tribunal, the latter will have to be before the designated forum (which in the case of cooperative societies are Courts specified under the respective State cooperative societies Act.) Therefore, the Securitization Act does not allow the Centre to make cooperative societies subject to Debt Recovery Tribunal. It only provides greater power to the cooperative societies to recover their debts without recourse to banks or tribunals.

In other words, Debt Recovery Tribunals have exclusive jurisdiction with respect to suits filed by financial institutions for recovery of debts and all incidental matters related to. Therefore, they can remand other cases ‘related to the subject matter of’ recovery proceedings’ for adjudication (discussed in greater detail in an earlier post). However, the inverse is not necessarily true. That is, if an application is filed by a borrower against the financial institution in the Debt Recovery Tribunal, then it does not follow that tribunal can exercise its exclusive jurisdiction and remand recovery proceedings initiated by financial institutions before other authorities to itself. This means that an action brought by a borrower against the cooperative society before the Debt recovery tribunal and a suit filed by the cooperative society against the borrower in another forum can stand simultaneously independent of each other. Thus, the Securitization Act is not in contravention of the Supreme Court’s decision in Greater Offshore.

In conclusion, although the ruling of the Bombay High Court settles one of the nagging issues in debt recovery laws, the dichotomy between the RDB Act and the Securitization Act over cooperative societies is clearly going to beset the Indian Courts in future.

Gautam Bhatia & Venugopal Mahapatra

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