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TMI Blog2012 (11) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... to Entries 1, 8, 13 and 21 of the Concurrent List. Although, it has been argued by Mr. Ganguli (Advocate for Appellant) that the provisions of the Companies Act would not be attracted, cannot be overlooked that the amendment to the definition of financial establishment included in the Tamil Nadu Act and as defined in the Pondicherry Act. The definition of the expression financial establishment in Section 2(d) of the Pondicherry Act includes any person or group of individuals or a firm carrying on business of accepting deposits under any scheme or arrangement or in any other manner, but does not include a Corporation or a cooperative society owned or controlled by either the Central Government or the State Government or a banking company as defined under Section 5 of the Banking Regulation Act, 1949. Thus the expression any person is wide enough to cover both a natural person as also a juristic person, which would also include a Company incorporated under the Companies Act, 1956. In that view of the matter, the definition in Section 2(d) of the Pondicherry Act would also include a Company such as the Appellant Mill, which accepts deposits from investors, not as shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2006 and 293 of 2007, which are the subject matter of Civil Appeal Nos.6673-6674 of 2009, filed by M/s New Horizon Sugar Mills Ltd. 2. As will be evident from the various writ petitions and writ appeals filed by the various parties, there are several skeins running through the fabric of the matter before us. The main issue, however, relates to the challenge thrown to G.O.Ms.No.12 dated 18.2.2006 issued by the Department of Revenue and Disaster Management, Government of Pondicherry, under powers conferred under the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2004 (Act 1 of 2005), ordering attachment of properties acquired by Pondicherry Nidhi Ltd. 3. For a proper understanding of the background in which the said G.O. came to be issued, it is necessary to set out, in brief, the facts of the case. 4. The lis between the parties to these appeals can be traced back to the credit facilities availed of by the Appellant, M/s New Horizon Sugar Mills Pvt. Ltd., from the Indian Bank, Pondicherry, to the tune of Rs. 26,50,00,000/-. The Directors of the Mill, viz., Shri V. Kannan and Shri V. Baskaran, stood as guarantors for repayment of the loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Chief Judicial Magistrate, Pondicherry, ordered attachment of various properties standing in their names and in the name of one Sivapriyal. This was followed by the Government Order, being G.O.Ms.No.12 dated 18.2.2006, ordering attachment of the properties acquired by M/s PNL Nidhi Ltd. Inasmuch as, by virtue of the said orders of attachment, M/s Parry Ltd. could not get the Sale Certificate registered in respect of the property auctioned, it filed Writ Petition No.6453 of 2006 for quashing the said G.O.Ms.No.12 dated 18.2.2006 and for a direction to the District Registrar, Registration Department, Pondicherry, to register the Sale Certificate in their favour with regard to the properties in which they had succeeded in the auction sale. The Indian Bank also filed Writ Petition No.5389 of 2006 for the same relief so that they could comply with the provisions of the SARFAESI Act for registering the Sale Certificate in favour of M/s Parry Ltd. The Appellant Mill filed Writ Petition No.1897 of 2006 for an appropriate direction to the Indian Bank to return to them such sums as would be due from out of the total sale consideration after deducting the dues of the Bank incurred as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attachment and sale of the properties of the Appellant Mill. The said Writ Petitions were considered by another learned Judge of the Madras High Court, who by his order dated 12th July, 2005, in PNL Depositors Welfare Association v. Union of India [2005] 64 SCL 115, with reference to the SARFAESI Act, the Sick Industrial Companies (Special Provision) Act, 1958, Act 1 of 2005 and the provisions of the Industrial Disputes Act, 1947, and in particular, Section 25FF thereof, disposed of the Writ Petitions upon holding that the members of the workers' association/workers, either individually or through their respective Unions, were entitled to the benefit available under Section 25FF of the 1947 Act from the Appellant Mill and Parry Ltd., in view of Section 13(6) of the SARFAESI Act. In the same order, the learned Judge directed the members of the Depositors' Association and others to avail of the remedies provided under the SARFAESI Act, as well as Act 1 of 2005, for necessary reliefs. The said decision of the learned Single Judge was questioned by Parry Ltd. and the Commissioner of Central Excise, Pondicherry, who filed W.A. Nos.1787 of 2005 and 1999 of 2005 respectively, claiming tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99, was struck down, a batch of Writ Petitions came to be filed before the Madras High Court challenging the provisions of the Tamil Nadu Act. Since the provisions of the Maharashtra Act had been struck down by a Full Bench of the Bombay High Court, the Writ Petitions were also contested before a Full Bench, which considered the contentions relating to the jurisdiction of the State Government, with reference to various Entries in the Seventh Schedule to the Constitution, provisions of the Companies Act, Reserve Bank of India Act and the Maharashtra Act and after examining the challenge thrown to the vires of the Act, came to the conclusion that the Tamil Nadu Act did not suffer from any legislative incompetency, nor was it arbitrary, unreasonable, or violative of the principles of natural justice. The Writ Petitions were, accordingly, dismissed. The Division Bench after considering the pronouncement of the Full Bench in regard to the Tamil Nadu Act and finding that the entire provisions of the Pondicherry Act 1 of 2005 were in pari materia with the provisions of the Tamil Nadu Act, held that the challenge to the legislative competency and jurisdiction of the Government of Pondicher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of properties in the name of the Appellant, New Horizon Mills, Pondicherry, and Arunachala Sugar Mills, Thiruvannamalai, and also for purchase of land at Kumbakonam, and land and buildings in Pondicherry and Chennai. The investigation conducted by the C.I.D., Pondicherry, revealed that the deposits collected from the depositors of PNL Nidhi Ltd. had been channelised to New Horizon Sugar Mills, wherein also Kannan and Baskaran were the Directors. It was on account of the bogus cheques which had been issued and dishonoured for want of funds, that the Chief Judicial Magistrate, Pondicherry, ordered attachment of the properties of the Appellant Mill and its Directors and in order to save the innocent investors from such companies and firms, the Government of Pondicherry introduced the Pondicherry Protection of Interests of Depositors (in Financial Establishments) Bill, 1997, which ultimately became an Act in 2004. 14. Appearing for the Appellant, Mr. A.K. Ganguli, learned Senior Advocate, submitted that the primary question for determination in these appeals is whether the subject matter covered by the Pondicherry Act is referable to Entries 43, 44, 45 and 97 of the Union List or to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 5 of the Banking Regulation Act, 1949." 17. Referring to the Statement of Objects and Reasons in the enactment of the Pondicherry Act, 2004, Mr. Ganguli pointed out that it had been specifically indicated that there had been a mushroom growth of non-banking financial establishments and deposit-taking unincorporated bodies not covered under the Reserve Bank of India Act, 1934, in different parts of the country. Accordingly, it was proposed to undertake a legislation which sought to protect the deposits made by the public in financial establishments not being companies registered under the Companies Act, 1956, or a Corporation or a Cooperative Society owned or controlled by the State Government or the Central Government or a Banking Company under the Banking Regulation Act. The Division Bench of the Madras High Court in the impugned judgment has referred to the Full Bench decision of the said Court from which the appeals in K.K. Baskaran's case (supra) arose. In paragraph 13-g of the said judgment, it was recorded that it was also useful to refer to the stand taken by the Advocate General who defended the Tamil Nadu Act before the Full Bench by stating that the Act was int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tral legislation to regulate control of either unincorporated or incorporated companies in the matter of depositors, who have deposited their hard-earned money with the financial establishments, the State Government was fully competent to bring out legislation to suit the needs of the public and to protect the interests of the depositors as well as in the public interest. Mr. Ganguli submitted that even though the Reserve Bank of India Act, 1934, prohibits acceptance of deposits and prescribes a penalty on any violation of the provisions of the Act, no provision or mechanism had been included for attaching the properties of the financial establishments and the properties of mala fide transferees. Referring to paragraph 91 of the Full Bench judgment, Mr. Ganguli submitted that it had been clearly indicated therein that the mere absence of exercise of such power conferred under Section 58B (5A) or 58G of the Reserve Bank of India Act, could not by itself validate the impugned legislation where the Government had proposed to protect the interests of depositors, in the public interest and in order to regulate the activities of such financial institutions, which power could be traced to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one competent to enact the said law. Mr. Ganguli pointed out that the subsequent enactment of Section 58AA which made special provisions in relation to small depositors and declared non-compliance with the provisions thereof as a criminal offence punishable with imprisonment of three years and fine, was also referable to Entries 43 and 44 of the Union List, being an amendment to the Companies Act which was a central enactment. 21. Several other decisions on the same lines were referred to by Mr. Ganguli which need not, however, detain us as the Full Bench of the Bombay High Court had held that the Maharashtra Act fell within the exclusive jurisdiction of the Parliament being referable to Entries 43, 44, 45 and 97 of List I of the Seventh Schedule. 22. Referen c e was then made to the decision of this Court in K.K. Baskaran's case (supra). Mr. Ganguli urged that in the said case it was the validity of the Tamil Nadu Act alone which was considered by this Court and this Court took note of the fact that the "financial companies" had not obtained any licence from the Reserve Bank of India and hence they were not governed by the Reserve Bank of India Act, nor the Banking Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact, a proxy litigation since the companies which had received the deposits from the various depositors had not come to the High Court, but were being represented by a sister concern, namely, M/s New Horizon Sugar Mills Ltd. It was submitted that the State Government had acted in accordance with the Entries in List II as there was no occupied field to oust the competence of the State Government to legislate in regard to Entries 1 and 30 of List II. According to Mr. Venkataramani, the question of repugnancy of the Central legislation having an overriding effect on the State legislation, did not arise in the facts of the case. In the light of his aforesaid submissions, Mr. Venkataramani contended that the issues which arose for consideration in these appeals were : (i) Whether the judgment of this Court in Baskaran's case has any relevance for disposal of the appeal? (ii) Even if the said judgment was not to be relied upon, whether the Pondicherry Act of 2005 is constitutionally valid being protected by the provisions of Section 18 and 21 of the Government of Union Territories Act, 1963? and (iii) Whether the Appellant not being an "establishment" which has received the deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, claim any locus to challenge the validity of the Pondicherry Act of 2005. Interestingly, it was also pointed out that the licence granted to Pondicherry Nidhi Ltd. by the Reserve Bank of India in terms of Section 45 IA of the Reserve Bank of India Act, 1934, stood cancelled on 14th September, 2005. Mr. Venkataramani submitted that it was also required to be taken into consideration that the licence granted to Pondicherry Nidhi Ltd. by the Reserve Bank of India in terms of Section 45 IA of the Reserve Bank of India Act, 1934, stood cancelled on 14.9.2005 and technically there is, therefore, no company licenced or registered to carry on the non-banking financial activities, which were pending before this Court. 28. On the Scheme of the legislative powers of Union Territories and the Parliament, Mr. Venkataramani submitted that the absence of Parliamentary legislation on a Union List subject does not clothe the State Legislature with the competence to enact a legislation and that deficiency in Parliamentary legislation, referable to the Union List, could not also confer competence on the State Legislature to fill in the gaps, having regard to the Scheme of the Union Territories A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulating the business of corporations. Reliance was placed on the decision of this Court in R.C. Cooper v. Union of India [1970] 3 SCR 530, wherein the fine distinction between regulation of the business activities of and regulation of a corporation was noticed. In fact, Sections 58A and 58AA of the Companies Act, 1956, and Section 45S of the Reserve Bank of India Act, 1934, could well fall within the scope of Entries 43 and 44 of List I. Mr. Venkataramani argued that an offence whether committed by individuals or other legal entities would fall within the scope of Entry I List III viz. "criminal law". It is for that purpose that Entry I List III provides for an exclusion from "offences against laws with respect to any of the matters specified in List I and List II". 30. It was further pointed out that Entries 93 in List I and 64 in List II are similarly worded and do not refer to offences against laws with respect to any of the matters in the List. In that context, it was submitted that the Pondicherry Act is not a new law within the scope of Entry 93 of List I. It was further submitted that the Pondicherry Act of 2005 not being a law falling within the scope of Entries 43 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the public order, which is a concept of wide amplitude. It was contended that apart from the decision of this Court in Romesh Thappar v. State of Madras [1950] SCR 594 and Ram Manohar Lohia v. State of Bihar AIR 1966 SC 740, this Court had also considered the question in Rev. Stainislaus v. State of M.P. [1977] 2 SCR 611 and Arun Ghosh v. State of West Bengal [1970] 3 SCR 288 and has in no uncertain terms held that certain deviations could be resorted to in order to deal with securing public order. Furthermore, security of transactions and their integrity are equally and deeply relevant to public order. The reference to and reliance placed upon Entry 97 of List I was, therefore, misconceived. 33. It was then submitted that the submissions made on behalf of the Appellant that Section 2(d) of the Pondicherry Act does not include incorporated entities, as distinct from the corresponding provisions of the Tamil Nadu Act, is misconceived. While the definition of "financial establishment" in the Tamil Nadu Act was apparently different, the ultimate result was the same. Furthermore, the Pondicherry Act uses the expression "person" in wide terms to include natural persons (as individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect to Union Territories under Article 246(4) of the Constitution of India. While deciding the said issue, it was held by this Court that where the enactment could be related to and upheld with reference to some constitutional value, its validity should be upheld. The third decision is also on the same lines. 35. Mr. Venkataramani ended on the note that since the Parliamentary Act had received the assent of the President, it would have effect irrespective of the Central legislation and as decided in Charan Lal Sahu v. Union of India [1990] 1 SCC 613 conceptually and jurisprudentially there is no bar on the State to assume responsibilities analogous to parens patria to discharge the State's obligations under the Constitution. Learned counsel also referred to the Bhopal Gas Leak Disaster Act, which has been traced to Entry 13 of the Concurrent List. Mr. Venkataramani urged that the Appeals were entirely misconceived and were liable to be dismissed. 36. From the case made out on behalf of the Appellant Mill and the submissions in support thereof, what emerges for decision is whether the subject matter covered by the Pondicherry Act is relatable to Entries 43, 44, 45 and 97 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for which the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act were enacted, are identical, namely, to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust. 41. However, coming back to the constitutional conundrum that has been presented on account of the two views expressed by the Madras High Court and the Bombay High Court, it has to be considered as to which of the two views would be more consistent with the constitutional provisions. The task has been simplified to some extent by the fact that subsequently the decision of the Bombay High Court declaring the Maharashtra Act to be ultra vires, has been set aside by this Court, so that there is now a parity between the judgments relating to the Maharashtra Act and the Tamil Nadu Act. 42. The three enactments referred to hereinabove, were framed by the respective legislatures to safeguard the interests of the common citizens against exploitation by unscrupulous financial establishments mushrooming all over the country. That is, in fact, the main object indicated in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of clause (2), the law made by the Parliament would prevail and the law made by the State Legislature to the extent it is repugnant to the Central law, shall be void. Clause (2), however, also provides that in a given situation where a law of a State is in conflict with the law made by Parliament, the law so made by the State Legislature shall, if it has received the assent of the President, prevail in that State. In the instant case, the Pondicherry Act had received the assent of the President attracting the provisions of Article 254(2) of the Constitution. 45. At this stage, it may also be worthwhile to consider Mr. Venkataramani's submissions that the power to enact the Pondicherry Act could be traced to Entries 1, 8, 13 and 21 of the Concurrent List. Entry 1 of List III deals with criminal law, including all matters included in the Indian Penal Code at the commencement of this Constitution, but excluding offences against laws with respect to any of the matters specified in List I or List II and excluding the use of naval, military or air forces or any other armed forces of the Union in aid of the civil power. Entry 8 deals with actionable wrongs. Entry 13 deals with ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the validity of the Tamil Nadu Act and the Maharashtra Act have been upheld by the Madras High Court and this Court. The objects of the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act being the same and/or similar in nature, and since the validity of the Tamil Nadu Act and the Maharashtra Act have been upheld, the decision of the Madras High Court in upholding the validity of the Pondicherry Act must also be affirmed. We have to keep in mind the beneficial nature of the three legislations which is to protect the interests of small depositors, who invest their life's earnings and savings in schemes for making profit floated by unscrupulous individuals and companies, both incorporated and unincorporated. More often than not, the investors end up losing their entire deposits. We cannot help but observe that in the instant case although an attempt has been made on behalf of the Appellant to state that it was not the Appellant Company which had accepted the deposits, but M/s PNL Nidhi Ltd., which had changed its name five times, such an argument is one of desperation and cannot prima facie be accepted. This appears to be one of such cases where funds have been collected ..... X X X X Extracts X X X X X X X X Extracts X X X X
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