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TMI Blog2005 (9) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court. The liquidator was directed to recover the amounts due to the company and not distribute any portion of the recoveries to the creditors. Among the consequential directions was a direction to the Official Liquidator to associate three persons from amongst the secured creditors as part of a committee that would submit a report to the court on the viability of the company. The Official Liquidator is stated to have submitted a report to the Andhra Pradesh High Court recording that an amount of Rs. 17 crores could be recovered by the company; that certain decrees have been obtained for the recovery of the outstanding dues which would have to be executed. The company is stated to have received notices from depositors at Mumbai, Pune, Aurangabad and Nagpur seeking the repayment of their deposits on maturity and it has been stated that notices have been received threatening prosecution against the company and its directors under the provisions of the State Act. A declaration has been sought in these proceedings that the Act is ultra vires on the ground that the State Legislature did not possess legislative competence. We have adverted to the facts of the main petition before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1992 (15 of 1992); ( ii ) amounts contributed as capital by partners of a firm; ( iii ) amounts received from a scheduled bank or a co-operative bank or any other banking company as defined in clause ( c ) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); ( iv ) any amount received from, ( a ) the Industrial Development Bank of India, ( b ) a State Financial Corporation, ( c ) any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964 (18 of 1964), or ( d ) any other institution that may be specified by the Government in this behalf; ( v ) amounts received in the ordinary course of business by way of, ( a ) security deposit, ( b ) dealership deposit, ( c ) earnest money, ( d ) advance against order for goods or services; ( vi ) any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in the State; and ( vii ) any amount received by way of subscriptions in respect of a chit. 5. The expression financial establishment is similarly defined in section 2( d ) as follows: ( d ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notwithstanding anything contained in any other law for the time being in force,- ( i ) where upon complaints received from the depositors or otherwise, the Government is satisfied that any financial establishment has failed,- ( a ) to return the deposit after maturity or on demand by the depositor; or ( b ) to pay interest or other assured benefit; or ( c ) to provide the service promised against such deposit; or ( ii ) where the Government has reason to believe that any financial establishment is acting in a calculated manner detrimental to the interest of the depositors with an intention to defraud them; and if the Government is satisfied that such financial establishment is not likely to return the deposits or make payment of interest or other benefits assured or to provide the services against which the deposit is received, the Government may, in order to protect the interest of the depositors of such financial establishment, after recording reasons in writing, issue an order by publishing it in the Official Gazette, attaching the money or the property believed to have been acquired by such financial establishment either in its own name or in the name of any other person from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interest or title in the property of the financial establishment. Sub-section (4) of section 7 empowers the designated court, in the following terms, to realise the assets attached and to equitably distribute the proceeds among the depositors of the establishment: (4) The designated court shall, if no cause is shown and no objections are made under sub-section (3), on or before the specified date, forthwith pass an order making the order of attachment absolute, and issue such direction as may be necessary for realisation of the assets attached and for the equitable distribution among the depositors of the money realised from out of the property attached. 10. Under sub-section (5) of section 7, the designated court has to follow the summary procedure under Order 37 of the Code of Civil Procedure, 1908 (5 of 1908) and upon an investigation under sub-section (5), the court is empowered by sub-section (6) to either make the order of attachment absolute or to vary or cancel the order of attachment. The proviso to sub-section (6) lays down that the designated court shall not release from attachment any interest which the financial establishment or a person specified in sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g financial companies and in Chapter III-C in relation to individuals and unincorporated bodies. The entire gamut is, therefore, covered by Central legislation. The legislative competence of Parliament to enact section 58A of the Companies Act, 1956, was upheld in Delhi Cloth General Mills Co. Ltd. v. Union of India [1983] 54 Comp. Cas. 674 . The provisions of Chapter III-C of the Reserve Bank of India Act, 1934 were upheld by a Division Bench of the Delhi High Court in Kanta Mehta v. Union of India [1987] 62 Comp. Cas. 769 and this judgment was affirmed by the Supreme Court in T. Velayudhan Achari v. Union of India [1993] 77 Comp. Cas. 197. The Legislature of the State of Tamil Nadu, it was submitted, had enacted legislation, but while doing so, specifically excluded from its operation, companies registered under the provisions of the Companies Act, 1956 and NBFCs. Counsel appearing on behalf of the petitioners has assailed the attempt on the part of the State Government to sustain the validity of the legislation on the ground that it relates to public order within the meaning of entry 1 of the State List. There was nothing in the Act, it was submitted, which has any bearing on pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venth Schedule : 13. Entries 43, 44 and 45 of the Union List to the Seventh Schedule to the Constitution provide as follows : 43. Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including co-operative societies. 44. Incorporation, regulation and winding up of corporations, whether trading or not, with objects not confined to one State, but not including universities. 45. Banking. 14. The entries in the State List that have a bearing on the submission in the present case on the part of the respondents are thus : 1. Public order (but not including the use of any naval, military or air force or any other armed force of the Union or of any other force subject to the control of the Union or of any contingent or unit thereof in aid of the civil power). 32. Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities; unincorporated trading, literacy, scientific, religious and other societies and associations; co-operative societies. 64. Offences against laws with respect to any of the matters in this list. Entry 93 of the Union List deals with Offences aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment) Act, 1974, repayment was liable to be made in full by April 1,1975. Sub-section (3A) of section 58A was inserted by the Amending Act of 1988 with effect from 1-9-1989. Sub-section (3A) provides as follows : (3A) Every deposit accepted by a company after the commencement of the Companies (Amendment) Act, 1988, shall, unless renewed in accordance with the rules made under sub-section (1), be repaid in accordance with the terms and conditions of such deposit. 17. Sub-section (5) of section 58A is material for the purposes of these proceedings and it provides thus : (5) Where a company omits or fails to make repayment of a deposit in accordance with the provisions of clause ( c ) of sub-section (3), or in the case of a deposit referred to in sub-section (4), within the time specified in that sub-section, ( a ) the company shall be punishable with fine which shall not be less than twice the amount in relation to which the repayment of the deposit has not been made, and out of the fine, if realised, an amount equal to the amount in relation to which the repayment of deposit has not been made, shall be paid by the court, trying the offence, to the person to whom repayment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt were based on the Report of the Parliamentary Committee on Home Affairs and similarly provided thus : The Committee welcomes the amendment proposed to be made through this clause in section 58A of the Companies Act, 1956, to debar such companies as default in making timely repayment of deposits to the public from accepting further deposits till the default in this behalf is made good by them. The Committee, however, feels that the penal provisions which presently exist in the Act to bring to book the companies which harass the depositors are seldom invoked or even if they are invoked, the necessary will to pursue them to their logical end is lacking on the part of official enforcement machinery. The Committee is, accordingly, of the view that the enforcement machinery be geared up to ensure more vigorous implementation of these penal provisions so that the depositors, particularly, the small investors who cannot afford to wage protracted legal battles with the defaulting companies, do not continuously suffer on getting their hard earned money back. The Committee also recommends that strict norms of accountability be laid down in this regard and such of the officials as show laxi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into existence a lender-borrower relationship and that the legislation fell within the scope of money lending and money lenders in entry 30 of the State List. Applying the doctrine of pith and substance, the Supreme Court held that section 58A of the Companies Act, 1956 was referable to entries 43 and 44 of the Union List and that Parliament did possess legislative competence to enact the provision. Entry 43 of the Union List, it must be noted, deals with the incorporation, regulation and winding up of trading corporations, including, inter alia, banking and financial corporations. Entry 44 deals with the incorporation, regulation and winding up of corporations, whether trading or not, with objects not confined to one State. 23. The word regulation , it is well-settled, is one of width and amplitude. In Indu Bhushan Bose v. Rama Sundari Debi [1969] 2 SCC 289, a Constitution Bench of the Supreme Court read the word regulation in entry 3 of List I to include the power to control, govern or direct by rules or regulations. The court held that this power to direct or control will include within all its aspects and all ingredients of regulation of house accommodation would be comprehend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criminal offence under sub-section (10) of section 58A, which is punishable with imprisonment which may extend to three years and to a fine as spelt out in the section. The subsequent enactment by Parliament of section 58AA is referable to the legislative head contained in entries 43 and 44 of List I. Section 58AA makes a special provision in relation to small depositors and once again a failure to comply with the provisions of the section or with an order of a Company Law Board constitutes a criminal offence which is punishable with imprisonment up to three years and a fine. The encroachment on the Union List : 25. The law enacted by the State Legislature in this case seeks to deal with fraudulent defaults by financial establishments. A fraudulent default within the meaning of the State legislation covers essentially three situations : ( i ) a default on the part of a financial establishment in the repayment of a deposit with such benefits in the form of interest, bonus, profit or in any other form as promised; ( ii ) the failure to render a specified service promised or agreed against the deposit with an intention of causing wrongful gain to one person and wrongful loss to anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution among the depositors of the money realised from out of the properties that are attached. The legislation enacted by the State Legislature, in the present case, therefore, clearly and substantially encroaches upon the area of operation of section 58A and section 58AA of the Companies Act, 1956. The Supreme Court held that section 58A is referable to entries 43 and 44 of List I. This would apply to section 58AA as well. The encroachment by the State legislation is on an area which falls within the exclusive legislative competence of Parliament in the Union List. The Reserve Bank of India Act, 1934 : A. Chapter III-B and NBFCs : 26. Parliament amended the provisions of the Reserve Bank of India Act, 1934, by the insertion of Chapters III-B and III-C. Chapter III-B enacts provisions relating to non-banking institutions receiving deposits and financial institutions. Clause ( aa ) of section 45-I which contains definitions, defines company to mean a company in section 3 of the Companies Act, 1956. A deposit is defined in clause ( bb ) of section 45-I to include and to have always included any receipt of money by way of deposit or loan or in any other form, but to exclude certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board constituted under section 10E of the Companies Act, 1956 (1 of 1956) may, if it is satisfied, either on its own motion or on an application of the depositor, that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order : Provided that the Company Law Board may, before making any order under this sub-section, give a reasonable opportunity of being heard to the non-banking financial company and the other persons interested in the matter. B. Chapter III-C : Individuals and unincorporated bodies 28. Chapter III-C was inserted by Parliament in the Reserve Bank of India Act, 1934 by an amendment of 1984 to provide a prohibition on the acceptances of deposits by unincorporated bodies. Section 45S provides as follows: 45S. Deposits not to be accepted in certain cases. No person, being an individual or a firm or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but with the acceptance of deposits. The petitioners lent money to businessmen and did not engage in the business of trading but of accepting deposits. The Delhi High Court noted that in the judgment of the Supreme Court in Delhi Cloth General Mills Co. Ltd. s case ( supra ), submissions founded on entry 30 of the State List were negatived by the Supreme Court. Even if the subject of Chapter III-C did not squarely fall within the scope of banking in entry 45 of the Union List, the only other entry which would cover the topic is, residuary entry 97 of the said List. 31. The judgment of the Delhi High Court was affirmed in appeal by a Bench of three learned judges of the Supreme Court in T. Velayudhan Achari s case ( supra ). Paragraph 16 of the judgment of the Supreme Court extracts the conclusions drawn by the Delhi High Court and one of those relating to the legislative competence of Parliament to enact Chapter III-C was thus : The business of acceptance of deposits from the public does not fall within entry 30 or entry 32 of List II of Schedule VII of the Constitution. It falls within entry 45 or in any case under entry 97 of List I of Schedule VII under which only Parliament has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the Federal Court in Lakhi Narayan Das v. Province of Bihar AIR 1950 FC 59. Justice B. K. Mukherjea delivering the judgment of the Federal Court, noted the comprehensive ambit of the expression public order in item 1 of the Provincial List to the Government of India Act, 1935 : The expression public order with which item 1 begins is, in our opinion, a most comprehensive term and it clearly indicates the scope or ambit of the subject in respect to which powers of legislation are given to the province. Maintenance of public order within a province is primarily the concern of that province and subject to certain exceptions which involve the use of His Majesty s forces in aid of civil power, the Provincial Legislature is given plenary authority to legislate on all matters which relate to or are necessary for maintenance of public order. [Emphasis supplied] (p. 63) 36. In Romesh Thappar v. State of Madras AIR 1950 SC 124, the Supreme Court, dealing with the same subject-matter observed thus : ... public order is an expression of wide connotation and signifies that state of tranquillity which prevailing among the members of a political society as a result of the internal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reasonable and a restriction imposed by law on grounds of public order on the fundamental rights under article 19(1)( a ), 19(1)( b ) and 19(1)( c ) has accordingly been construed. On the other hand, public order as a legislative head has been construed in the decision of the Federal Court in Lakhi Narayan Das s case ( supra ) as being an expression of wide connotation and as signifying that state of tranquility which prevails among the members of a political society as a result of internal regulations enforced by the Government. The head public safety is used as a part of the wider concept of public order. In the second Ram Manohar Lohia s case ( supra ) which took note of the distinction, Mr. Justice Hidayatullah formulated a conceptual basis on the foundation of three concentric circles, law and order being the largest within which is a circle representing public order, and the smallest representing security of the State. The Supreme Court held that an act may affect law and order but not public order just as an act may affect public order but not the security of State. Subsequent decisions which deal with the law of preventive detention have since dealt with the ambit of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its meaning or content or for that matter one that would render an entire entry nugatory. A general word in an entry must be so construed as to comprehend all matters which reasonably can be regarded as ancillary or subsidiary. The Constitution is an organic document which demarcates the powers of legislation in a federal polity. The legislative entries have been found to overlap and, therefore, legislation with respect to one of the entries may well trench upon an entry in another legislative list. The court then has recourse to the doctrine of pith and substance. If in pith and substance a legislation falls within one list but some part of the subject matter falls within an entry in another list, the Act would be valid notwithstanding an incidental trenching. These principles which must guide the court were reiterated by the Constitution Bench in Kerala State Electricity Board v. Indian Aluminium Co. Ltd. AIR 1976 SC 1031. The Supreme Court held that while construing the provisions of clauses (1), (2) and (3) of article 246, where an entry is in general terms in List II, and part of that entry is in specific terms in List I, the entry in List I takes effect notwithstanding the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the State Legislature in this case can be justified with reference to public order in entry 1 of List II, must primarily depend upon the true nature and character of the legislation. Undoubtedly, as the Supreme Court held in Shashikant Laxman Kale v. Union of India [1990] 185 ITR 104 1 to sustain the presumption of constitutionality, considerations may be had even to matters of common knowledge; the history of the times; and every conceivable state of facts existing at the time of legislation which can be assumed. Reliance has been placed on the Statement of Objects and Reasons to demonstrate that a situation had evolved in the State of Maharashtra in which financial establishments had mushroomed with the object of grabbing money received as deposits from the public on the basis of attractive rates of interest or rewards. There were defaults in the repayment of deposits and these defaults created law and order problems in the State, more particularly in Mumbai which in the fashion of the times is referred to as the financial capital . 44. The question as to whether the legislation is with reference to public order must turn on the provisions which have been made by the Legis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such apparatus to the detriment of tranquility, health and comfort of others is quite another. Entry 6 of the State List inter alia deals with public health and sanitation. The Supreme Court held that it could not be said that public health did not demand control of the use of such apparatus by day or by night, or in the vicinity of hospitals, schools, offices or habited localities. Hence, the power to legislate in relation to public health included the power to regulate the use of amplifiers as producers of loud noises when the right of such user, by the disregard of the comfort of and obligation to others emerges as a manifest nuisance to them. The Supreme Court hence, held that the pith and substance of the Act was the control of the use of amplifiers in the interests of health and also tranquility. The court held that the substance of the legislation was under entry 6 and conceivably, entry 1 of the State List. The second decision is a decision of the Constitution Bench in Rev. Stainislaus v. State of Madhya Pradesh [1977] 1 SCC 677. In that case, the controversy arose over the Madhya Pradesh Dharma Swatantraya Adhiniyam, 1968 and the Orissa Freedom of Religion Act, 1967. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rehensible to the conscience of the community. . . . (p. 683) 46. Both these cases provide instances where the subject-matter of the legislation had a real and substantial nexus with respect to public order. In the first case, the law regulated the use of amplifiers and the Supreme Court held that there was a real connection between public health and tranquility on the one hand and the use of amplifiers on the other. Excessive use of loud speakers in disregard to the comfort of others is liable to be a nuisance to society. Hence, the legislation was held to be relatable to public health and conceivably, to public order. In the second case, a recourse to conversion by force, threat or through the use of fraudulent means was liable to raise communal passions and to give rise to an apprehension of a breach of public order affecting the community at large. In the present case, on the other hand, the substance of the legislation is not to deal with a problem of public order, but to control and regulate deposits accepted by financial establishments by creating an offence of a fraudulent default in the payment of deposits and laying down provisions for the attachment of assets, realisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... List. The trespass into the field of operation of the Central legislation was only incidental. That was, therefore, a case where the creation of an offence by the State Legislature was under a legislation referable to the power of the State Legislature to legislate on a subject clearly falling within the State List. 48. Finally, it was urged on behalf of the State even if the court were to come to the conclusion that the State law insofar as it regulates companies and NBFCs is unconstitutional, the legislation could well be saved in its application to individuals and unincorporated entities by applying the doctrine of severability. It is not possible to accept this submission. The provisions of Chapter III-C of the Reserve Bank of India Act, 1934, were upheld by the Delhi High Court in Kanta Mehta s case ( supra ) specifically with reference to the legislative head contained in entry 45 of List I or at any rate entry 47. These provisions regulate individuals and unincorpo-rated bodies in relation to the acceptance of deposits. The judgment of the Delhi High Court was upheld by the Supreme Court in T. Velayudhan Achari s case ( supra ). The judgment of the High Court having been ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 50. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 52. 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. 53. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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