REPORTABLE | |
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.6673-6674 OF 2009
M/s New Horizon Sugar Mills Ltd. … Appellant
Vs.
Govt. of Pondicherry … Respondent
J U D G M E N T
ALTAMAS KABIR, J.
1. Several Special Leave Petitions (now Civil Appeals) were filed in
this Court against the common judgment and order dated 27th March, 2007,
passed by the Madras High Court, including Writ Appeal Nos.1788 & 1919 of
2005, 1142 to 1144, 1209, 1342 to 1345 of 2006, 293 of 2007 and
W.P.Nos.44991, 45805 of 2006 & 1460 of 2007. Of the said appeals, we are
concerned with Writ Appeal Nos.1144 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 and offered
their personal properties as collateral securities. As the Appellant Mill
defaulted in payment of the loan amount, the Bank, after declaring the loan
account of the Mill to be a “non-performing asset”, initiated proceedings
for recovery by issuing notice under Section 13(2) of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, (“SARFAESI Act”). The said notice was challenged by the
Appellant by filing Writ Appeal No.33700 of 2004, before the Madras High
Court. By order dated 6th December, 2004, the said Writ Appeal was
disposed of with a direction to the Appellant Mill to repay the entire loan
amount in three instalments.
5. In the same order, the Court also indicated that in case the
Appellant defaulted in payment of the instalments, the Bank could proceed
against the Appellant Mill, in accordance with law. Since the Appellant
Mill committed default even in payment of the first instalment, the Bank
proceeded further and under the provisions of Sub-Sections (2) and (4) of
Section 13 of the SARFAESI Act took possession of the property offered as
security and also initiated steps for sale of the same by auction. In the
auction proceedings, M/s E.I.D. Parry (India) Ltd. (“Parry Ltd.”) was the
successful bidder. The said auction was challenged by several other banks
and financial agencies to safeguard and protect their respective claims
against the Mill. On 12th July, 2005, all the Writ Petitions, including
the one filed by the workers/employees of the Appellant Mill, were
dismissed. In respect of the Writ Petition filed by Pondicherry Nidhi Ltd.
(PNL) Depositors Welfare Association, the High Court directed the
Association to work out their remittance under the provisions of the
Reserve Bank of India Act (“RBI Act”) as also Act 1 of 2005.
6. On receiving the Sale Confirmation Letter from the Bank, Parry Ltd.
remitted their entire balance amount and fulfilled all other formalities
for getting the Sale Certificate registered in its favour. At the same
time, on the basis of a complaint received from one of the depositors,
alleging that Shri V. Kannan and Shri V. Baskaran, said to be the major
shareholders of M/s PNL Nidhi Ltd. as well as being the Directors of the
Appellant Mill, had misappropriated a sum of Rs.12.5 crores belonging to
M/s PNL Nidhi Ltd. and diverted the same for their own trade, 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 on 1st January, 2005, the date on which
possession of the property in question was taken over and for return of the
remaining documents pertaining to the movable and immovable properties
belonging to the Appellant after satisfying the Bank’s charge. The
Appellant Mill filed another Writ Petition No.8797 of 2006 challenging the
validity of G.O.Ms.No.12 dated 18.2.2006. Several other Writ Petitions
were filed by Shri V. Kannan and Shri V. Baskaran and M/s Indian Renewable
Energy Development Agency Ltd. (“IREDA”), New Delhi, and M/s Arunachalam
Sugar Mills Ltd., Pondicherry, also filed several Writ Petitions
challenging the validity of the aforesaid Government Order.
7. A learned Single Judge of the Madras High Court took up the Criminal
Revision Petition No.1352 of 2005 filed by the Bank questioning the Order
dated 18th February, 2005, passed by the Chief Judicial Magistrate in Crime
No.31 of 2004, along with various Writ Petitions filed by different
parties, and by his order dated 23rd August, 2006, the learned Judge lifted
the order of attachment passed in respect of the properties in question and
also directed the District Registrar, Registration Department, Pondicherry,
to register the Sale Certificate issued in favour of M/s Parry Ltd. The
learned Single Judge further directed the Appellant (Writ Petitioner in
Writ Petition No.1897 of 2006) to approach the Debts Recovery Tribunal
under Section 17 of the SARFAESI Act regarding their claim of refund of the
excess amount alleged to have been retained by the Bank. The learned Judge
also made it clear that as far as the properties included in the impugned
orders were concerned, it would be open to third parties to approach the
Designated Court under Act 1 of 2005 for appropriate relief.
8. Questioning the said common order, the Appellant Mill and its Directors
filed Writ Appeal Nos.1142 to 1144 of 2006 and the Pondicherry Non-Banking
Investors Protection Association preferred Writ Appeal Nos.1342 to 1345 of
2006. However, while upholding the validity of Act 1 of 2005, the learned
Judge limited its operation to Unincorporated Institutions. Aggrieved by
the said decision, the Government of Pondicherry preferred Writ Appeal
No.293 of 2007.
9. Yet another facet of the issues involved in these Appeals is the Writ
Petitions filed by the Banks and Financial Institutions to safeguard their
interests in regard to 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 Investors’ Welfare Association Versus Union of India, 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 that the
Department’s claims were superior to those of others against the Appellant
Mill and its properties.
10. A third set of Writ Petitions was filed by Puduvai Pradesa Sarkarai
Aalai Thozhilalar Sangam; Indian Bank and the Ariyur Sugar Mills Staff
Welfare Union being W.P. Nos.24834, 30532 and 36900 all of 2005, praying
for appropriate directions. By a common order dated 7th December, 2005,
another learned Judge of the Madras High Court appointed Justice K.P.
Sivasubramaniam, a retired Judge of the Madras High Court, as Commissioner
to go into the claims of the workmen. By the same order the learned Judge
directed the Indian Bank to deposit Rs.6 crores in a no-lien account in the
Indian Bank, Pondicherry Main Branch, on 8th December, 2005. Questioning
the said order, the Appellant Mill filed Writ Appeal No.1209 of 2006. All
the said matters were taken up for consideration together by the Division
Bench. In its impugned judgment, the Division Bench agreed with the
conclusion arrived at by the learned Single Judge with leave to the parties
to approach the Tribunal to protect their interests. Writ Appeal No.1142
of 2006 was, accordingly, dismissed, with liberty to the Appellant Mill to
approach the Debts Recovery Tribunal for appropriate relief.
11. Apart from the submissions relating to Section 25FF of the Industrial
Disputes Act, 1947, what we are really concerned with in these appeals is
with regard to the validity of the Pondicherry Protection of Interests of
Depositors in Financial Establishments Act, 2004 (Act 1 of 2005) and
G.O.Ms.No.12 dated 18.2.2006 issued by the Department of Revenue and
Disaster Management. As indicated hereinbefore, the object of the Act was
to protect the interests of depositors in financial establishments in the
Union Territory of Pondicherry. The Division Bench of the High Court
observed that, inasmuch as, the Tamil Nadu Protection of Interests of
Depositors (in Financial Establishments) Act, 1997, were in pari materia
with the provisions of the Pondicherry Act of 2005 and the provisions of
the Tamil Nadu Act had been upheld, nothing further was required to be gone
into in that regard. However, after the decision of a Full Bench of the
Bombay High Court in the case of Vijay C. Puljal vs. State of Maharashtra
[(2005) 4 CTC 705], by which the Maharashtra Protection of Interest of
Depositors (in Financial Establishments) Act, 1999, 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 Pondicherry in enacting the impugned Act, was liable to be
rejected.
12. A question of considerable importance also came up for consideration
in the appeal filed by the Government of Pondicherry with regard to the
observations of the learned Single Judge in Writ Petition No.1897 of 2006,
wherein the learned Single Judge while upholding the validity of the
enactment, went on to observe that the impugned enactment was made only in
relation to unincorporated trade establishments and the State Legislature
of Pondicherry had legislative competence to legislate in respect of
unincorporated financial establishments only. In this regard, a submission
was made on behalf of the Government of Pondicherry to the effect that
Entry 32 of List II of the Seventh Schedule to the Constitution was only a
residue of Entry 42 in the Central List and that Entry 32 also covered
incorporated companies. It was submitted that the learned Single Judge had
erroneously held that Pondicherry Act 1 of 2005 only governed
unincorporated trade establishments.
13. In this regard, it was submitted before the Madras High Court by the
learned Government Pleader that on a complaint received by the Pondicherry
Police from one Boothanathan, alleging that the amount deposited by him in
PNL Nidhi Ltd. had not been returned, the Pondicherry Police registered a
case in Crime No.31 of 2004 on the file of the C.I.D., Pondicherry, which
took up the investigation. Subsequently, about 3000 complaints were
received from mostly aged people and retired Government servants who had
invested their savings in the various financial establishments. On inquiry
it was found that PNL Nidhi Ltd. had changed its name five times. It was
initially a company known as “Pondicherry Mutual Fund Ltd.” incorporated
under the Companies Act, 1956. The name of the Company was later changed
to Prasanan Narayanan Laxmi Nidhi Ltd. The name of the Company was again
changed to PNL Nidhi Ltd. The Company floated various schemes, such as
Fixed Akshaya Deposit and Locker facility and accepted deposits under the
said scheme. It was also discovered that PNL Nidhi Ltd. was an
unregistered and unrecognized financial establishment and that the
promoters of PNL Nidhi Ltd. were Kannan and Baskaran, who were brothers and
were also the Directors of the Appellant Mill. It also transpired that the
funds of the PNL Nidhi Ltd. were utilized for the purchase 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 Entries 1,
30 and 32 of the State List. The other question for determination is
whether the decision of this Court in K.K. Baskaran Vs. State of Tamil Nadu
[(2011) 3 SCC 793], rendered in the context of the Tamil Nadu Protection of
Interests of Depositors (in Financial Establishments) Act, 1997, could be
regarded as a precedent for determining the questions which have arisen in
relation to the Pondicherry Act.
15. Mr. Ganguli urged that the Tamil Nadu Act dealt with the protection
of deposits made by the public in the financial establishments. Section
2(3) of the said Act defines “financial establishments” not to include a
Company registered under the Companies Act, 1956, or a Banking Company as
defined under Section 5(c) of the Banking Regulations Act, 1949, (“the 1949
Act”), or a non-banking financial company as defined in clause (f) of
Section 45(1) of the Reserve Bank of India Act, 1949. Mr. Ganguli urged
that in 2003, Section 2(3) of the Tamil Nadu Act was amended omitting the
words “a company registered under the Companies Act, 1956” and inserting
the words “a non-banking financial company” as defined in clause (f) of
Section 45-I of the Reserve Bank of India Act, 1949, after the words “does
not include”. By the same amendment, the words “a company registered under
the Companies Act, 1956” were introduced into Sub-Section (3) of Section 2.
The amended provision now reads as follows :-
“(3)’financial establishment’ means an individual, an association of
individuals, a firm or a company registered under the Companies Act,
1956 (Central Act 1 of 1956) carrying on the business of receiving
deposits under any scheme or arrangement or in any other manner but
does not include a corporation or a co-operative society owned or
controlled by any State Government or the Central Government or a
banking company as defined in Section 5 (c) of the Banking Regulation
Act, 1949 (Central Act 10 of 1949).”
16. Mr. Ganguli urged that in contrast, the Pondicherry Act defined the
expression “financial establishment” in Section 2(d) to mean :-
“…. 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 co-operative society
owned or controlled by the Government, any State Government or the
Central Government, or a banking company as defined under 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 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 intended to realize the
deposits made by the public in the financial establishments, whether they
were incorporated or not. The Division Bench went on to hold further that
the entire reasoning of the Full Bench was applicable to the impugned Act
of the Government of Pondicherry. Accordingly, the Division Bench held that
the financial establishments referred to in Section 2(d) of the impugned
Act covered both unincorporated and incorporated trading establishments.
18. Mr. Ganguli tried to impress upon us that in view of the aforesaid
decisions in the language adopted in the definition of “financial
establishments” in the two Acts, the Court would be required to examine the
issue carefully to determine as to whether the decision in K.K. Baskaran’s
case (supra) relating to the Tamil Nadu Act could ipso facto be made
applicable to determine the scope and ambit of the Pondicherry Act.
19. Coming to the next question as to whether the State enactments as
well as the Parliamentary enactments covered the same field, namely,
“investor’s protection”, Mr. Ganguli submitted that the decision of the
Full Bench of the Madras High Court in the case of S. Bagavathy Vs. State
of Tamil Nadu [2007) 1 LW 892] dealing with the Tamil Nadu Act and other
Parliamentary legislations prohibiting and regulating acceptance of
deposits by financial establishments, held the same to be a valid piece of
legislation. The Full Bench, inter alia, observed that the existing laws,
namely, Section 58A of the Companies Act, 1956, regulates the acceptance of
the deposits and Section 45S of the Reserve Bank of India Act, 1934,
prohibits the acceptance of deposits and also prescribes suitable
punishments and penalties for contravening the same, but neither of the
existing laws provide for regulating the activities of the financial
establishments, which not only duped the innocent depositors and accepted
deposits from them, but also siphoned off, diverted or transferred the
funds for their own use in a mala fide manner. Mr. Ganguli submitted that
the existing laws did not provide for the attachment of the properties that
were procured either in the name of the financial establishments or in the
name of any other person from and out of the deposits collected by the
financial establishments. Mr. Ganguli also urged that the Full Bench
further observed that in the absence of any effective remedy in the Central
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 the field of legislation under Entries 1 and 32 of List
II of the Seventh Schedule to the Constitution. It was categorically
observed by the Full Bench that where no licence had been obtained from the
Reserve Bank of India to commence and continue operations, the question of
applicability as well as violation of the directions issued under Section
45S of the Reserve Bank of India Act by the Reserve Bank of India remains
unanswered. The Full Bench had also observed that concededly none of the
Petitioners had obtained licence from the Reserve Bank of India nor can the
business of financial establishments in accepting deposits be strictly
construed to be “banking”, as defined under the Banking Regulations Act,
1949. Mr. Ganguli urged that since none of the Petitioners are companies
registered under the Companies Act, 1956, the provisions of the said Act
would not be applicable to them. It was also observed that the impugned
legislation was enacted in the public interest to regulate the activities
of the financial establishments falling under Entries 1 and 32 of the State
List. Mr. Ganguli urged that it is in such background that the Full Bench
concluded that the Tamil Nadu Act could be traced to the field of
legislation under Entries 1 and 32 of List II of the Seventh Schedule,
without analyzing the full scope of the said Entries on the one hand and
Entries 43, 44 and 45 of the Union List, on the other.
20. Referring to the decision of the Full Bench of the Bombay High Court
in Vijay C. Puljal’s case (supra), which had declared the Maharashtra
Protection of Interests of Depositors (in Financial Establishment) Act,
1999, to be ultra vires for want of legislative competence of the State
legislature, Mr. Ganguli contended that the Full Bench had relied upon the
decision of this Court in Delhi Cloth and General Mills Vs. Union of India
[(1983) 4 SCC 166] in which the validity of Section 58A of the Companies
Act, 1956, which regulated deposits accepted by companies, was questioned
on the ground that the subject matter of the enactment, in pith and
substance, fell within the subject matter of Entry 30 of the State List.
This Court had, however, upheld the validity of Section 58 of the Companies
Act, upon holding that the subject matter of the legislation could be
referred to Entries 43 and 44 of the Union List and the Parliament was,
therefore, alone 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. Reference 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 Act,
1949. In the context of the above, this Court observed that the Tamil Nadu
Act is not focused on the transactions of banking or the acceptance of
deposits, but is focused on remedying the situation of the depositors who
were deceived by the fraudulent financial establishments. Applying the
doctrine of pith and substance, this Court held that the said Act was
referable to Entries 1, 30 and 31 of List II of the Seventh Schedule to the
Constitution and not Entries 43, 44 and 45 of List I thereof. Mr. Ganguli
urged that the decision of the Full Bench of the Bombay High Court was the
subject matter of the pending appeal when the decision in K.K. Baskaran’s
case (supra) was rendered. The appeal from the decision of the Full Bench
of the Bombay High Court came to be considered subsequently on 29th
September, 2011, when the constitutional validity of the Maharashtra Act
was upheld with the rider that if any party wished to submit that it was
not covered by the Maharashtra Act or the Tamil Nadu Act, it would be open
to them to take appropriate proceedings before the forum concerned.
23. Mr. Ganguli lastly urged that the decision in K.K. Baskaran’s case
(supra) was rendered ex-parte without any representation from either the
State or the Union Government and while the judgment may be binding between
the parties, it had no precedence value. Submitting that there were
several other similar matters pending with regard to the acceptance of
deposits by companies and regulation thereof with a view to providing
protection to investors, Mr. Ganguli urged that the appeals were liable to
be allowed.
24. Concluding his submissions, Mr. Ganguli reiterated that it was
evident that the subject matter of the Pondicherry Act is referable to
various Parliamentary laws in existence which deal with investors’
protection and provide measures for recovery, which were covered under
Entries 43, 44, 45 and 97 of the Union List : Mr. Ganguli submitted that
the attempt to make the said Entries referable to Entries 1, 30 and 32 of
the State List, was erroneous and the appeals were liable to be allowed
upon the setting aside of the judgment and order passed by the Division
Bench of the Madras High Court.
25. At the very initial stage of his submissions, Mr. R. Venkataramani,
learned Senior Advocate appearing for the Government of Pondicherry,
submitted that the present litigation was, 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 in question and not being one of the class of establishments
within the meaning of Section 2(d) of the Act, could be permitted to
challenge the validity of the Act as a proxy for the defaulting
establishment?
26. Mr. Venkataramani urged that the second question indicated
hereinabove involved the interpretation of Articles 246 and 254 of the
Constitution and the Government of Union Territories Act, 1963. It was
urged further that having regard to the distinction between the position of
States and Union Territories in the Scheme of the Constitution and under
the provisions of the Government of Union Territories Act, 1963, this Court
would have to consider the said issue as a pure question of law relevant
for determination of the vires of the law. Mr. Venkataramani submitted
that regardless of the submissions made by the Appellant with regard to the
judgment in K.K. Baskaran’s case (supra), the Pondicherry Act of 2005
deserves to be upheld for special reasons and on other grounds emerging
from the provisions of the aforesaid Act. Mr. Venkataramani also contended
that the challenge thrown to G.O.Ms.No.12 dated 18.2.2006 being beyond the
scope of the Act, was not acceptable, since the Appellant neither received
any deposits directly from the depositors nor did it directly engage in the
business of granting financial loans, and would not, therefore, fall under
Section 2(d) of the Act which deals with financial establishments. It was
further urged that since the Appellant was a stranger to the legislation,
its locus could be confined only to infringing actions taken under the Act.
27. Mr. Venkataramani submitted that the Appellant Company had been set
up primarily to lend support to the challenge to the G.O.Ms.No.12 dated
18.2.2006. Mr. Venkataramani submitted that M/s PNL Nidhi Ltd., the
offending establishment, had not filed any petition relating either to the
Act or the Government order. As a consequence, the actual establishment
which would fall under Section 2(d) of the Act was not before the Court.
It was contended that M/s PNL Nidhi Ltd. has been shown as the Respondent
in both the two writ petitions, while Writ Appeal Nos.1142 and 1143 of
2006 were filed by M/s Kannan and others, with M/s PNL Nidhi Ltd. as the
second respondent. In the absence of appeals by the parties directly
covered by the Act, the Appellant could not, as an alter ego of such
parties, 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 Act, 1963. It was submitted
that the judgments cited on behalf of the Appellant in support of his two-
fold submissions referred to above, all relate to conflicts between
Parliamentary and State Legislations referable to Lists I and II of the
Seventh Schedule and the Scheme of Article 246 of the Constitution. In such
cases, overlapping of Parliamentary and State Legislations, referable to
Entries in the Concurrent List, stand on a different footing and the
threshold embargo on the State Legislature to enact laws relatable to Union
List, does not exist. In such cases, the only issue which could at all
arise would be with regard to repugnancy and that too provided the
legislations contained conflicting provisions. Referring to the decision of
this Court in Ramji and others vs. State of U.P. & others [(1956 SCR 393],
Mr. Venkataramani submitted that the doctrine of pith and substance could
not be applied to the facts of this case on account of the fact that when
both the Central, as well as the State Legislatures, were operating in the
concurrent field, there was no question of trespass upon the exclusive
jurisdiction vested in the Centre under Entry 52 of List I. The only
question which, therefore, survived was whether putting both the pieces of
legislations enacted by the Centre and the State together, any repugnancy
could be traced, in which event a different set of consequences will
follow. In the instant case there being no question of any inconsistency,
any further question relating to the overriding effect of the Central
provision, would not arise. The question which necessarily arises is
whether the Parliament and the State Legislature exercised their powers
over the self-same subject matter, or whether the laws enacted by
Parliament were intended to be a complete and exhaustive code in
themselves.
29. Mr. Venkataramani submitted that the law in question is not in
substance a matter relating to incorporation, regulation or winding-up of
either incorporated or unincorporated entities and Entries 43 and 44 of
List I would have to be seen in the context of laws relating to
corporations and different modes of incorporation. It was submitted that
Entry 33 in the Federal List of the Government of India Act, 1935, combined
Entries 43 and 44 under List I of the Seventh Schedule to the Constitution,
as they are concerned with incorporation and regulations and providing for
measures regulating the business of corporations. Reliance was placed on
the decision of this Court in R.C. Cooper vs. 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 44 of the
Union List and falling within the Entries in List III, the question of
threshold lack of competence or invasion of a forbidden territory does not
arise. Whether or not the Parliament could effect any further expansion of
the provisions of Sections 58A or 58AA, could not, therefore, occupy the
field relating to offences or crimes which are questions that can only be
raised in the context of List I and List II controversies, and are
irrelevant for the purposes of the present case.
31. According to Mr. Venkataramani, one of the other reasons for enacting
the Pondicherry Act of 2005 was to protect the interests of depositors and
the Pondicherry Act of 2005 has primarily made the retention of deposits
as a wrongful and fraudulent act and thus constituting a crime and an
actionable wrong. It was further submitted that the Act provides for a
special procedure and machinery for retrieval of the deposits or such
property as may answer and satisfy the claims of the depositors. The law,
therefore, essentially provides for tracing the source of the monies and
the deposits in the hands of third parties and make it available to satisfy
the claims of the depositors. According to Mr. Venkataramani, the
aforesaid legislation would fall under Entry I (criminal law); Entry 8
(actionable wrong), Entry 13 (civil procedure) and Entry 21 (commercial and
industrial monopolies) of List II of the Seventh Schedule to the
Constitution. According to Mr. Venkataramani, none of the measures
under the Act could be said to relate to regulation of the business
activities of any corporation and even if such submission is taken to be
correct, the Pondicherry Act of 2005 could not be traced to Entries 43 or
93 of List I. Reference was also made to the decision of this Court in
Greater Bombay Co-op Bank vs. United Yarn [(2007) 6 SCC 236].
32. Going a step further, Mr. Venkataramani urged that even if the
reference to Entries 1 and 30 of List II could be open to question, Entry
32 of List II, insofar as it permitted any law relating to incorporated or
unincorporated establishments, would be available not as a law regulating
the business activities of the establishments, but as a law dealing with
actionable wrongs committed by establishments. Consequently, no
interference was called for with the decision of the Madras High Court as
the law in question had been enacted to deal with securing the public
order, which is a concept of wide amplitude. It was contended that apart
from the decision of this Court in Romesh Thapar Vs. State of Madras
[(1950) SCR 594] and Ram Manohar Lohia (1991) 1 SCR 709], this Court had
also considered the question in Rev. Stainislaus Vs. State of M.P. [(1977)
2 SCR 611] and Arun Ghosh Vs. 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 individuals) and
companies. Mr. Venkataramani submitted that the expression “person” has
been exhaustively dealt with in P. Ramanatha Ayyar’s “Advanced Law Lexicon”
and did not require any further elucidation. Referring to Section 11 of the
Indian Penal Code, Mr. Venkataramani submitted that the same defines a
person to include a company or association or body of persons whether
incorporated or not. Accordingly, the use of the expression “person” in
the Pondicherry Act also included both unincorporated as well as
incorporated companies.
34. Mr. Venkataramani urged that there was no repugnancy at all between
the provisions of the Pondicherry Act or the Companies Act, 1956 and/or the
Reserve Bank of India Act and in the absence of any occupied legislation
enacted under the provisions of the Companies Act and the Reserve Bank of
India Act, the question as to whether the Pondicherry Act was subservient
to the Central legislation was no longer relevant, particularly when the
said Act had received the assent of the President and was, therefore,
protected under Article 254(2) of the Constitution. Consequently, the law
being traceable to Entry 32 of List II and Entries 1, 8, 13 and 21 of List
I and the same having received the assent of the President, stands fully
protected by the provisions of Section 31 of the 1963 Act. In support of
his submissions Mr. Venkataramani referred to the decisions of this Court
in S. Pushpa and others Vs. Sivachanmugavelu and others [(2005) 3 SCC 1],
New Delhi Municipal Council Vs. State of Punjab & Others [(1997) 7 SC 339]
and T.M. Kanniyan Vs. I.T.O. Pondicherry [(1968) 2 SCR 103]. In the first
of the said three decisions, this Court had the occasion to consider the
question of reservation in regard to recruitment of Scheduled Caste
candidates in the Union Territory of Pondicherry. It was held that those
Scheduled Caste candidates who had migrated from other States would be
eligible for selection and appointment to posts reserved for the Scheduled
Caste candidates in the Union Territory of Pondicherry, since it had
consistently followed the policy of the Central Government where all
candidates irrespective of the State/Union Territory were given the benefit
of reservation and the selections made pursuant to such policy were valid.
The second decision in the case of New Delhi Municipal Council was with
regard to the powers of the Central Government to make laws with respect 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 Vs. 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 the Union List or to Entries 1, 30 and 32 of the State
List. Coupled with the aforesaid question is the other question as to
whether the decision of this Court in K.K. Baskaran’s case (supra),
upholding the validity of the Tamil Nadu Act, would also be applicable for
determining the validity of the Pondicherry Act, having particular regard
to Mr. Ganguli’s submissions that there were major differences in the two
enactments.
37. As far as the first question is concerned, on a scrutiny of the
Seventh Schedule to the Constitution, it will be seen that Entries 43, 44
and 45 of List I of the Seventh Schedule to the Constitution deal with the
following matters, namely,
“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.”
38. In other words, each of the above-mentioned Entries deal with matters
relating to trading corporations, which include banking, insurance and
financial corporations, whereas Entries 1, 30 and 32 of List II deal with
the following :-
“1. Public order (but not including [the use of any naval, military
or air force or any other armed force or 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).
30. Money-lending and money-lenders; relief of agricultural
indebtedness.
32. Incorporation, regulation and winding up of corporations, other
than those specified in List I, and universities; unincorporated
trading, literary, scientific, religious and other societies and
associations; co-operative societies.”
39. The Entries relating to the State List referred to above, and in
particular Entry 30, appear to be a more appropriate source of legislative
authority of the State Assembly for enacting laws in furtherance of such
Entry. The power to enact the Pondicherry Act, the Tamil Nadu Act and the
Maharashtra Act is relatable to Entries 1, 30 and 32 of the State List,
which involves the business of unincorporated trading and money-lending
which falls within the ambit of Entries 1, 30 and 32 of the State List.
40. In addition to the above, it has also to be noticed that the objects
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 the
Statement of Objects and Reasons of the three different enactments.
43. Even if it is to be accepted that the Pondicherry Act is relatable to
Entries 43, 44 and 45 of List I, it can be equally said that the said
enactment is also relatable to Entries 1, 30 and 32 of List II, thereby
leaving the field of legislation open, both to the Central Legislature as
well as the State Legislature. In such a situation, unless there is
anything repugnant in the State Act in relation to the Central Act, the
provisions of the State Act will have primacy in determining the lis in the
present case. Apart from the above, the provisions of the Pondicherry Act
are also saved by virtue of Article 254(2) of the Constitution. For a
proper understanding of the legal position, the provisions of Article 254
are extracted hereinbelow :-
“254. Inconsistency between laws made by Parliament and laws made by
the Legislatures of States – (1) If any provision of a law made by the
Legislature of a State is repugnant to any provision of a law made by
Parliament which Parliament is competent to enact, or to any provision
of an existing law with respect to one of the matters enumerated in
the Concurrent List, then, subject to the provisions of clause (2),
the law made by Parliament, whether passed before or after the law
made by the Legislature of such State, or, as the case may be, the
existing law, shall prevail and the law made by the Legislature of the
State shall, to the extent of the repugnancy, be void;
(2) Where a law made by the Legislature of a State with respect to one
of the matters enumerated in the concurrent List contains any
provision repugnant to the provisions of an earlier law made by
Parliament or an existing law with respect to that matter, then, the
law so made by the Legislature of such State shall, if it has been
reserved for the consideration of the President and has received his
assent, prevail in that State:
Provided that nothing in this clause shall prevent Parliament from
enacting at any time any law with respect to the same matter including
a law adding to, amending, varying or repealing the law so made by the
Legislature of the State.”
44. As will be evident from the above, clause (1) of Article 254 provides
that when there are two laws enacted by the Parliament and the State
Legislature in which certain inconsistencies occur, then subject to the
provisions 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 civil procedure while Entry 21
deals with Commercial and Industrial monopolies, combines and trusts. Such
submission has been advanced by Mr. Venkataramani in view of the provisions
of Section 58A, 58AA and 58AAA of the Companies Act, 1956, which all deal
with deposits invited and accepted by Companies. The said submission is,
however, subject to the condition that the provisions of the Companies Act
are also attracted to the provisions of the Pondicherry Act. Although, it
has been argued by Mr. Ganguli that the provisions of the Companies Act
would not be attracted, we cannot overlook 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, which has been
extracted in paragraph 14 hereinbefore, 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. In our view, 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 of such Company, but merely as investors for the purpose of
making profit. In this regard, reference may also be made to Section 11 of
the Indian Penal Code which defines a “person” to include a Company or
Association or body of persons, whether incorporated or not. Accordingly,
we are inclined to accept Mr. Venkataramani’s submissions that the
expression “person” in the Pondicherry Act includes both incorporated as
well as unincorporated companies.
46. The decision in K.K. Baskaran’s case (supra) so far as it relates to
protection of interests of depositors, cannot be ignored. In our view the
decision rendered by the Madras High Court in K.K. Baskaran’s case (supra)
would be equally applicable to the facts of this case. We have to bear in
mind that 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 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.
47. In such circumstances, we are not inclined to accept the submissions
made by Mr. Ganguli, since in our view there is little difference between
the provisions of the Tamil Nadu Act and the Pondicherry Act, which is to
protect the interests of depositors who stand to lose their investments on
account of the diversion of the funds collected by M/s PNL Nidhi Ltd. for
the benefit of the Appellant Mill, which is privately owned by Shri V.
Kannan and Shri V. Baskaran, who are also Directors of M/s PNL Nidhi Ltd.
48. The Appeals are, accordingly, dismissed with costs assessed at
Rs.1,00,000/-.
………………………………………………………J.
(ALTAMAS KABIR)
………………………………………………………J.
(J. CHELAMESWAR)
New Delhi
Dated:27.09.2012
