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2005 (9) TMI 303 - HIGH COURT OF BOMBAYPublic deposits - Constitutional validity of the Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999 - default to return the deposits on maturity or to pay interest or render the services in kind, in return, as assured to the public - Non-banking finance company - Director of the company failed to comply with an order of the Company Law Board - scope of "money lending and money lenders" in entry 30 of the State List - HELD THAT:- In relation to corporate entities, the State law penalises a species of default—a fraudulent failure to repay—which is clearly within the purview of the sanctions imposed by the Companies Act, 1956. The State law regulates by imposing penal sanctions on transactions which Parliament has regulated by the imposition of sanctions. The penalties which the State law envisages are at variance with what Parliament envisaged. Provisions have been made in the State law for attachment, realisation and equitable distribution of assets among depositors. There are provisions for tracing assets and for the avoidance of mala fide transfers. The State Government submits that Parliamentary legislation was deficient and the law had to be armed with teeth to reach out to and penalise wrong doing. This lies outside the competence of the States where the subject of the legislation is with respect to an entry in the Union List. The deficiencies that are perceived in Parliamentary legislation have to be corrected by Parliament. The State Legislature cannot arrogate to itself the power to supplant, or for that matter, supplement Parliamentary legislation on an area in the Union List. That is what in effect the State Legislature has done here on the logic that Parliament has not been adequate in its enactment. That logic is not constitutionally sound in our federal polity. Public order is a subject that is reserved to the States in our constitutional scheme. It may appear tautological to say that legislation on public order must in substance be based upon public order. The point is of significance because numerous problems of law enforcement and of maintaining public order have their genesis in diverse and complex societal issues. If the State, in the process of enacting legislation on public order, were to legislate by regulating substantive areas which fall in the Union List, that would lead to the destruction of the basic scheme envisaged in the distribution of legislative powers. Legislation on public order must address public order. Otherwise, in the guise of legislating on public order, substantive areas which are reserved to Parliament in the Union List would be subject to regulation by the States. This is impermissible. A law on public order must truly and essentially address itself to the preservation and maintenance of public order. That is not what the State law does in the present case. The essential nature of the State law in the present case is not public order, but subjects which fall within the Union List. Thus, we hold that : (i) The provisions of section 58A of the Companies Act, 1956 have been upheld by the Supreme Court in Delhi Cloth & General Mills Co. Ltd. [1983 (7) TMI 205 - SUPREME COURT]. The provisions of Chapter III-C of the Reserve Bank of India Act, 1934 were upheld by the Delhi High Court in Kanta Mehta [1985 (12) TMI 361 - DELHI HIGH COURT]). The judgment of the Delhi High Court is affirmed by the Supreme Court in T. Velayudhan Achari [1993 (2) TMI 320 - SUPREME COURT]; (ii) The Supreme Court held that Parliament has legislative competence to enact section 58A of the Companies Act, 1956 and that the provision was relatable to the legislative heads contained in entries 43 and 44 of List I of the Seventh Schedule. The same principle of law must apply to the subsequent amendments to the Companies Act, 1956 by which the provisions of section 58AA and section 58AAA were introduced; (iii) The legislative competence of Parliament to enact Chapter III-C of the Reserve Bank of India Act, 1934 was upheld by the Delhi High Court with reference to the provisions of entry 45 of List I and at any rate with reference to entry 97 of List I. The reasoning of the Delhi High Court has been affirmed by the Supreme Court. Hence, it would not be possible for this court to hold that legislation regulating deposits in relation to unincorporated entities and individuals, is referable to a legislative head in the State List; (iv) The legislation enacted by the State Legislature in the present case directly conflicts with the provisions contained in the Central legislation. The ingredients of the offence of fraudulent default in the repayment of the deposits as created in section 3 of the State Act squarely fall within the provisions of section 58A and section 58AA. The State Legislature has created an offence in respect of the same subject-matter and providing for different punishments; (v) The law enacted by the State Legislature is in pith and substance referable to legislative heads contained in List I of the Seventh Schedule. The essential character of the legislation is not with reference to public order; (vi) The State Legislature has in the present case enacted a law which it was not competent to enact. The State legislation in the present case, namely, the Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999, is accordingly declared to be ultra vires. The petitions are accordingly allowed. There shall be no order as to costs. The issue as to whether the State Legislature has the legislative competence to enact the provisions of the Act involves a question as to the distribution of legislative powers between the Union and the States. The case involves a substantial question of law as to the interpretation of the Constitution, within the meaning of article 132(1) of the Constitution. We accordingly certify, under the provisions of article 134A of the Constitution, that the case involves a substantial question of law as to the interpretation of the Constitution.
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