Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. (2020)

It answers the question a banking paper must answer sooner or later: what is a bank, for constitutional purposes, and who may legislate for it?

A co-operative bank is a co-operative society. Entry 32 of List II gives the States the incorporation, regulation and winding up of co-operative societies. Entry 45 of List I gives the Union banking. Which entry governs a body that is both? The answer the five-judge Bench gave settles four propositions that carry far beyond co-operative banking:

• that recovery is an essential part of banking, so Parliament may legislate a recovery procedure under the banking entry;
• that a single institution may be governed by a Union entry for one aspect of its activity and a State entry for another — the aspect doctrine at work;
• that incidental trenching on another legislature's field does not invalidate a law; and
• the modern statement of the doctrine of pith and substance.

It is also the authority that brought co-operative banks within the enforcement machinery of the securitisation statute, which is a practical answer to a practical question in Module 3.

The matters were referred to a Bench of five because earlier decisions could not stand together. The question was the scope of the legislative field covered by entry 45 of List I, banking, and entry 32 of List II, and consequently the power of Parliament to legislate; the practical issue was the applicability of the securitisation statute of 2002 to co-operative banks.

The difficulty is easy to state and hard to resolve. Entry 32 of List II gives the States incorporation, regulation and winding up of co-operative societies. Entry 45 of List I gives the Union banking. A co-operative bank answers to both descriptions.

1. Are co-operative banks, which are also co-operative societies, governed by entry 45 of List I or entry 32 of List II, and to what extent?
2. Does banking company, as defined in the Banking Regulation Act 1949, cover co-operative banks registered under State co-operative laws and multi-State co-operative societies?
3. (a) Are co-operative banks at State and multi-State level banks for the purposes of the securitisation statute?
4. (b) Is the inclusion of multi-State co-operative banks in the definition, and the notification of 2003 notifying State co-operative banks, ultra vires?

The reference was answered in favour of Parliament's competence on every limb.

Banking is a Union subject, and recovery is part of banking

The central proposition is short: recovery falls within the purview of banking in entry 45 of List I, being an essential part of it. From that everything follows. If recovery is part of banking, Parliament may prescribe how bank dues are recovered, and may do so for any body carrying on banking.

The Court then applied the definition of banking functionally rather than formally. Co-operative banks are involved in banking activities because they accept money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise — which is the language of s. 5(b) of the Banking Regulation Act 1949.

The obvious objection was answered directly. Merely because lending of money is limited to members, co-operative banks cannot be said to be out of the purview of banking; they perform commercial functions. They are therefore covered by banking in entry 45 of List I.

That reasoning is worth carrying into any question on the definition of banking. What decides the matter is not the form of the institution but whether it does the four things s. 5(b) describes.

Incidental trenching does not invalidate

The proposition every allocation question needs is stated in a line: even incidental trenching upon other fields cannot invalidate legislation.

The Court reinforced it with a consequential argument worth reproducing, because it shows how a court tests a competing reading by its results. If co-operative banks were kept outside the banking legislation and the central bank's Act, no licence could be granted to them, and they could not do banking, since that is not permissible without compliance with the various provisions of the Banking Regulation Act 1949. They would have to close down and stop business forthwith. A construction that would destroy the institutions it purports to protect is not the right construction.

Pith and substance, and its reach

The judgment adopts an extended statement of the doctrine. Pith and substance can be applied to examine the validity of a legislation for want of legislative competence, and also where two legislations are embodied together for achieving the purpose of the principal Act. The Court rejected the argument that the doctrine has a very restricted application confined to competence. It finds its origin in the principle that it is necessary to examine the true nature and character of the legislation to know whether it falls in a forbidden sphere, and its application extends to repugnancy and to cases of this kind, which ultimately relate to statutory interpretation founded on the source of legislation.

The federal setting is expressly the reason for the care: in construing a federal Constitution, the distribution of legislative powers between the Centre and the States is of great significance.

Legislation by reference

A subsidiary but examinable point. Where a later Act picks up a definition from an earlier one, do later amendments to the earlier Act travel into the later? The Court adopted four exceptions to the rule against that:

1. where the subsequent Act and the previous Act are supplemental to each other;
2. where the two Acts are in pari materia;
3. where the amendment in the previous Act, if not imported into the subsequent Act, would render the subsequent Act wholly unworkable and ineffectual; and
4. where the amendment of the previous Act, expressly or by necessary intendment, applies those provisions to the subsequent Act.

And it refused to state the rule absolutely. It cannot be laid down as an absolute proposition that wherever legislation by reference exists, subsequent amendments to the earlier law stand implanted into the later law, without analysing the impact of such incorporation on the object and effectuality of the later law. What controls is the later law, being the principal law, its object, legislative intent and effective implementation.

Why a faster procedure was permissible

The older procedures ran through the civil court or tribunal, and the new procedure was prescribed without the intervention of a court or tribunal in order to keep pace with the time. The mischief was the malady of inordinate delay from which the order of a civil court suffered, as well as the co-operative tribunals and the summary procedure under co-operative societies legislation. Parliament may enact a law to provide recovery procedures for bank dues, and may do so by providing for speedy recovery of a secured interest without the intervention of a court or tribunal.

That passage is the bridge back to Mardia Chemicals, where the same justification was accepted in the face of a constitutional challenge.

The answers

| Question | Answer | |---|---| | 1(a) | Co-operative banks registered under State legislation and multi-State co-operative societies, with respect to banking, are governed by legislation relatable to entry 45 of List I | | 1(b) | The same banks, with respect to the aspects of incorporation, regulation and winding up, and matters outside entry 45 of List I, are governed by legislation relatable to entry 32 of List II | | 2 | Co-operative banks involved in banking are covered by banking company in the Banking Regulation Act 1949, and cannot carry on any activity without compliance with that Act and with the central bank's Act relatable to entry 38 of List I | | 3(a) | They are banks for the securitisation statute, and since recovery is an essential part of banking, the recovery procedure applies | | 3(b) | Parliament had competence to provide additional procedures for recovery; the inclusion of a multi-State co-operative bank in the definition, added out of abundant caution, is not ultra vires, nor is the notification |

The Court also observed that the notification of 2003 was itself issued out of abundant caution, because co-operative banks were already included by incorporation in the banking legislation.

Recovery of dues is an essential part of banking within entry 45 of List I, so Parliament may legislate a recovery procedure for bank dues, including one operating without the intervention of a court. A co-operative bank is governed by legislation relatable to entry 45 of List I as to its banking, and by legislation relatable to entry 32 of List II as to its incorporation, regulation and winding up. Co-operative banks which do the things s. 5(b) of the Banking Regulation Act 1949 describes are banking companies for that Act and banks for the securitisation statute, and the enforcement machinery of that statute applies to them.