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2005 (9) TMI 303 - HC - Companies LawPublic 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.
Issues Involved:
1. Constitutional validity of the Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999. 2. Legislative competence of the State Legislature to enact the law. 3. Overlap and conflict with existing Central legislation, specifically the Companies Act, 1956, and the Reserve Bank of India Act, 1934. 4. The application of the doctrine of pith and substance. 5. The applicability of the doctrine of severability. 6. The interpretation of "public order" as a legislative head under Entry 1 of List II. Detailed Analysis: 1. Constitutional Validity of the Maharashtra Act: The primary issue in this batch of petitions under Article 226 of the Constitution was the constitutional validity of the Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999. The court concluded that the provisions of the Act are ultra vires due to a lack of legislative competence in the State Legislature. 2. Legislative Competence of the State Legislature: The arguments were confined to whether the State Legislature had the legislative competence to enact the law. The petitioners argued that the Act fell within the purview of entries 43 and 44 of the Union List, which pertain to the incorporation, regulation, and winding up of trading and non-trading corporations. The State contended that the Act was referable to public order under Entry 1 of the State List. The court concluded that the State Legislature did not possess the legislative competence to enact the Act as it encroached upon the Union List. 3. Overlap and Conflict with Central Legislation: The court examined the provisions of the Companies Act, 1956, specifically sections 58A, 58AA, and 58AAA, which regulate the repayment of deposits by companies and non-banking financial companies (NBFCs). The court noted that the Central legislation comprehensively covers the subject matter of deposits and defaults. Similarly, the Reserve Bank of India Act, 1934, regulates NBFCs and unincorporated bodies. The court found substantial overlapping and conflict between the State Act and these Central legislations. 4. Doctrine of Pith and Substance: The court applied the doctrine of pith and substance to determine the true nature and character of the State legislation. It concluded that the Act, in pith and substance, falls within the legislative heads contained in List I of the Seventh Schedule (Union List). The legislation was found to be primarily concerned with the regulation of deposits and the imposition of penal sanctions, which are within the exclusive domain of Parliament. 5. Doctrine of Severability: The State argued that even if the Act was unconstitutional in its application to companies and NBFCs, it could still be valid for individuals and unincorporated bodies. The court rejected this argument, noting that the provisions of Chapter III-C of the Reserve Bank of India Act, 1934, already regulate individuals and unincorporated bodies. The court held that the entire Act was ultra vires and could not be severed to apply only to certain entities. 6. Interpretation of "Public Order": The State contended that the Act was referable to public order under Entry 1 of the State List. The court examined the scope of "public order" and concluded that the Act did not address public order in its essence. Instead, it dealt with fraudulent defaults in the repayment of deposits and the regulation of financial establishments, which fall under the Union List. The court emphasized that legislation on public order must truly address issues of public order, which the Act did not. Conclusion: The court declared the Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999, to be ultra vires. It held that the State Legislature lacked the competence to enact the law, as it encroached upon the legislative domain of Parliament. The petitions were allowed, and the Act was struck down. The court certified that the case involved a substantial question of law as to the interpretation of the Constitution, allowing for an appeal to the Supreme Court. No action was to be taken in pursuance of the judgment for a period of 12 weeks.
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