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TMI Blog2019 (9) TMI 828X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest of Depositors (In Financial Establishments) Act, 1999 (Act No.XVI, 2000) (hereinafter referred to as 'the MPID Act'). 2. The aforesaid question crops up for consideration in the backdrop of the following facts and the challenge raised in the petition : (a) Birla Power Solutions Ltd. is a public listed company, registered under the Companies Act, 1956. It was initially registered as 'Birla Yamaha Ltd.'. During the period 2009 to 2013, the company had accepted the deposits; including a deposit of Rs. 1 crore from Shri Hajarimal Somani Memorial Trust, on 9th March 2012 to be repaid along with interest @ 10.75 % per annum. The date of maturity was 8th March 2013. The Company committed default in repayment of the said amount along with interest. It is alleged that the Company had accepted deposits from thousands of investors, including the companies. Hence, Shri Bhagwan Suryakant Seth lodged a first information report against the Company and its Chairman, Managing Director and other Directors for the offences punishable under sections 409, 420, 477(A), 120(B) of Indian Penal Code, 1860 and section 3 of MPID Act. The petitioner is arraigned as accused No.11 therein. The inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provisions of the Companies Act and Rules framed thereunder, the provisions of MPID Act cannot be made applicable to such deposits. The petitioner asserts that the inclusion of the intercorporate deposits in the outstanding amount and the consequent issuance of the attachment orders in respect of various properties, by taking into account the said outstanding amount, is legally impermissible. Thus, the petitioner seeks a declaration that the intercorporate deposits do not come under the purview of the definition of 'deposit' under section 2(c) of the MPID Act and a consequential direction to delete and/or quash the names of the intercorporate deposit holders/lenders from the list of the depositors in MPID Case No.4 of 2014. SUBMISSIONS : 3. In the light of the aforesaid challenge, we have heard Shri Setalvad, the learned Senior Counsel for the petitioner and Shri Prakash Salsingekar, Special P.P. for the respondent No.1State at a considerable length. With the assistance of the learned counsels for the parties, we have also perused the material on record especially the chargesheet and the forensic audit report. 4. Shri Setalvad, the learned Sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the clear and unambiguous intent of the legislature. 5. In opposition to this, the learned Special PP stoutly submitted that the challenge raised by the petitioner is devoid of substance. Firstly, since no property of the petitioner has been attached, the petitioner cannot be said to have any locus to challenge the inclusion of the intercorporate deposits in the repayment of which the company has committed default fraudulently. Secondly, the amounts which do not fall within the purview of the term 'deposit' under clause (c) of section 2 of the MPID Act have been specifically enumerated therein in subclauses (i) to (vii). Thus, according to the learned Special P.P., legislature has taken care to exclude the amounts which do not come within the purview of term, 'deposit' for the purpose of the MPID Act. It cannot be said that the legislature was not aware of the transactions in the nature of intercorporate deposits. Thus, the Court cannot supplant the exclusion clause by adding an item which has not been specifically included by the legislature in clause (c) of section 2 of MPID Act. The learned Special P.P. further submitted that the very purpose of the MPID Act was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board of India Act, 1992 (15 of 1992) ; (ii) amounts contributed as capital by partners of afilm ; (iii) amounts received from a Scheduled bank or Cooperative 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 Institution ; (c) any financial institution specified in or undersection 6A of 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; and (c) earnest money; (vi) any amount received from an individual or afirm or an association or 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 receipt of a Chit. Explanation I -- "Chit" has the meaning as assigned to in clause (b) of Section 2 of the Chit Funds Act, 1982 (40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, the pivotal question which wrenches to the fore is whether the definition of 'deposit' under section 2(c) of the MPID Act covers in its fold 'intercorporate deposits' and can the MPID Act be said to have been enacted to protect the interest of the corporate depositors as well? 12. A brief historical reference to the regulation of acceptance of deposits by the Companies would be apposite at this juncture. By virtue of the Act, No. 41 of 1974, section 58A came to be inserted in the Companies Act, 1956. Subsection (1) of section 58A empowered the Central Government to prescribe the limits up to, and the manner in, and the conditions subject to, which the deposits may be invited or accepted by a company either from the public or from its members. Subsection (2) thereof provided the conditions subject to fulfillment of which a company could accept the deposits. Further provisions regulating the return of the deposits, renewal thereof, the consequences of failure to repay the deposits, acceptance of deposits in contravention of the provisions therein and the redressal mechanism were provided therein. For the purpose of section 58A, 'deposit' was defined to mean any d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ackdrop of this fact situation. Viewed from this angle, Sec. 58A will enable the Central Government to prescribe conditions subject to which deposits can be accepted and one such condition would be how to readily make, a small portion of the deposit, available for repayment because while inviting and accepting deposits, it is implicit therein that repayment would be assured on the date of maturity." (emphasis supplied) 16. To make the narration as regards legislative prescription complete, it may be necessary to note that the Companies Act, 2013, under section 2(c), defines 'deposit' to include any receipt of money by way of deposit or loan or any other form by company but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. 17. The Companies Act, 2013, in section 73 proscribes invitation, acceptance or renewal of the deposits from the public except in the manner provide in Chapter V thereof. The prescription, however, does not apply to a banking company and nonbanking financial company as defined in the Reserve Bank of India Act, 1934 and to such other company as the Central Government may, after consulta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statute and the mischief which the statute sought to curb. Thus, it would be necessary to note the statements of objects and reasons of MPID Act. It gives insight into the then prevailing circumstances, which necessitated the enactment of MPID Act, the evil it sought to remedy, and the object it sought to achieve. It reads as under : "There is a mushroom growth of Financial Establishments in the State of Maharashtra in the recent past. The sole object of these Establishments is of grabbing money received as deposits from public, mostly middle class and poor on the promises of unprecedented high attractive interest rates of interest or rewards and without any obligation to refund the deposit to the investors on maturity or without any provision for ensuring rendering of the services in kind in return, as assured. Many of these Financial Establishments have defaulted to return the deposits on public. As such deposits run into crores of rupees it has resulted in great public resentment and uproar, creating law and order problem in the State of Maharashtra, specially in the city like Mumbai which is treated as the financial capital of India. It is, therefore, expedient to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shy; "24. The Tamil Nadu Act was enacted to find out a solution for the problem of the depositors who were deceived on a large scale by the fraudulent activities of certain financial establishments. There was a disastrous consequence both in the economic as well as social life of such depositors who were exploited by false promise of high return of interest. These financial institutions/establishments did not come either under the Reserve Bank of India Act or the Banking Regulation act, and hence they escaped from public control. By the impugned Act the State not only proposed to attach the properties of such fraudulent establishments and the mala fide transferees, but also provided for the sale of such properties and for distribution of the sale proceeds amongst the innocent depositors. Hence, in our opinion, the doctrine of occupied field or repugnancy, has no application in the present case. 25 The object of the Tamil Nadu Act was to give a speedy remedy to the innocent depositors who were vulnerable to the temptation of earning high rates of interest and were victimized by the financial establishments fraudulently. As regards Section 58A of the Companies Act, this prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t explosion in Courts, would not have made it possible for the depositors to recover their money, leave alone the interest thereon. Hence, in our opinion the impugned Act has rightly been enacted to enable the depositors to recover their money speedily by taking strong steps in this connection. 33 The State being the custodian of the welfare of the citizens as parens patriae cannot be a silent spectator without finding a solution for this malady. The financial swindlers, who are nothing but cheats and charlatans having no social responsibility, but only a lust for easy money by making false promise of attractive returns for the gullible investors, had to be dealt with strongly. 33 The small amounts collected from a substantial number of individual depositors culminated into huge amounts of money. These collections were diverted in the name of third parties and finally one day the fraudulent financers closed their financial establishments leaving the innocent depositors in the lurch". (emphasis supplied) 26. A profitable reference can also be made to the judgment of the Supreme Court in the case of New Horizon Sugar Mills Limited Vs. Government of Pondicherry through Addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the validity of the Pondicherry Act 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 from the gullible public to invest in projects other than those indicated by the front company. It is in fact the specific case of the Respondents that the funds collected by way of deposits were diverted to create the assets of the Appellant Mill." 27. The validity of certain provisions of Andhra Pradesh Protection of Depositors of Financial Establishments Act, 1999 arose for con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid enactments, including the MPID Act, were expounded with more clarity, and in unequivocal words, in the case of New Horizon Sugar Mills Limited (Supra). The Supreme Court observed that the object of the three enactments were identical, namely, to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life's savings to unscrupulous and fraudulent persons. It was further observed that those enactments were framed to safeguard the interests of the common citizens against exploitation by unscrupulous financial establishments mushrooming all over the country. That was stated to be the main object indicated in the Statement of Objects and Reasons of the three different enactments. The Supreme Court went on to observe that the beneficial nature of the three legislations which is to protect interests of small depositors, who invest their life's savings in schemes for making profit floated by unscrupulous individuals and companies, both incorporated and unincorporated, needs to be kept in mind while testing the vires the provisions of the said enactments. 31. Can it be said that the aforesaid object of MPID Act equally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While making a business decision, the company is expected to weigh in a number of factors, including creditworthiness of another company with which it enters into a transaction, the viability of the business model of the later, the overall financial position and the corporate structure and governance of such company, and, ultimately, whether the said company would have the wherewithal to honour the financial commitment. 35. With key personnel, like directors and professional managers, a company is not expected to be easily lured by a mere promise of a higher percentage of return on investments, unlike an unsuspecting small time depositor. Th nature, structure and personnel equip a company to take an informed decision whether to enter into a business transaction, be it in the nature of advancement of a loan or making a deposit with another company. In our view, the exclusion of the receipt of money by one company from another company from the purview of the "deposit" needs to be appreciated in the aforesaid perspective, and that seems to be the rationale behind excluding the said transactions from regulation, under the provisions of the Companies Act and the Rules thereunder. 36. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d claims pari passu distribution, then the small depositors would be deprived of realization of their money to full potential. 39. In our considered opinion, obliterating the distinction between the corporate depositor and ordinary depositor would render the provisions of the other enactments, like Companies Act, redundant, which provide various remedies for the enforcement of the rights of the corporate depositors, ranging from a petition for winding up to a suit for recovery of the amount, and the corporate depositor may not be required to exhaust the remedies provided in the other enactments. The summary remedy provided in the MPID Act does not seem to have been conceived by the State legislature as the remedy for enforcement of the rights of one corporate entity against another. A corporate entity cannot claim to suffer from the vagaries which a small time depositor would encounter in realising the amount, in an ordinary manner, and for whom the summary remedy is provided. 40. In the aforesaid view of the matter, we are impelled to hold that the the intercorporate deposit/loan, i.e., a loan advanced / deposit made by a company with another company registered under the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of exchange would not qualify as 'deposit' within the meaning of MPID Act. Thus, this order will have no bearing on the claims of the holders of bills of exchange. Criminal Application No. 385 of 2019, thus, stands disposed of accordingly. 44. The conspectus of aforesaid consideration is that we are persuaded to allow the petition in the following terms : (i) The petition stands allowed. (ii) It is hereby declared that the intercorporate deposit/loan, i.e., a loan advanced/deposit made by a company with another company registered under the provisions of the Companies Act, 1956/2013 would not amount to a "deposit" within the meaning and for the purpose of the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999. (iii) It is further declared that the intercorporate deposits made with the financial establishments in the instant proceedings leading to MPID Special Case No.4 of 2014 shall not be taken into consideration for the purpose of the prosecution and proceedings under the MPID Act. (iv) Subject to the observations in paragraph 43, Criminal Application No. 385 of 2019 stands disposed off. 45. Rule made absolute in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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