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TMI Blog2005 (9) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... e the court have been confined to the legislative competence of the State Legislature to enact the law. Counsel appearing on behalf of the petitioners and the State had fairly stated before the court that it would become necessary for the court to deal with the other challenges only in the event that this court does not accept the principal challenge on the ground of a want of legislative competence. We have come to the conclusion that the provisions of the Act are ultra vires for want of legislative competence in the State Legislature. FACTS 2. The petitioner in Writ Petition No. 5186 of 2001, was a whole time director of Pennar Paterson Securities Limited, a company incorporated under the Companies Act, 1956, with a registered office at Hyderabad. The company was a non-banking finance company and is stated to have advanced money to several companies. The company is stated to have sustained huge losses and on 24-11-1999, the High Court of Andhra Pradesh noted in the course of its order in a company petition that the company had outstanding debts of Rs. 13.07 crores on 30-9-1999. A provisional liquidator was appointed by the High Court. The liquidator was directed to recover the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public. As such the 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 make a suitable special legislation in the public interest to curb the unscrupulous activities of such financial establishments in the State of Maharashtra." 4. Section 2(c) of the Act defines the expression "deposit" in the following terms : "(c) 'deposit' includes and shall be deemed always to have included any receipt of money or acceptance of any valuable commodity by any financial establishment to be returned after a specified period or otherwise, either in cash or in kind or in the form of a specified service with or without any benefit in the form of interest, bonus, profit or in any other form, but does not include- (i) amount raised by way of share capital or by way of debenture, bond or any other instrument covered under the guidelines given, and regulations made, by the SEBI, established under the Securities and Exchange Board of India Act, 1992 (15 of 1992); (ii) amounts contribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial establishment also shall be liable for a fine which may extend to one lakh of rupees. Explanation.-For the purpose of this section, a financial establishment, which commits default in repayment of such deposit with such benefits in the form of interest, bonus, profit or in any other form as promised or fails to render any specified service promised against such deposit, or fails to render any specific service agreed against the deposit with an intention of causing wrongful gain to one person or wrongful loss to another person or commits such default due to its inability arising out of impracticable or commercially not viable promises made while accepting such deposit or arising out of deployment of money or assets acquired out of the deposits in such a manner as it involves inherent risk in recovering the same when needed shall, be deemed to have committed a default or failed to render the specific service, fraudulently." 7. Section 4 of the Act provides for the attachment of properties upon a default in the repayment of deposits. Sub-sections (1) and (2) thereof are thus : "4. Attachment of properties on default of return of deposits.-(1) Notwithstanding anything cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in whose name such property is believed to have been invested or acquired or of any other property attached under section 4 for further orders of the designated court. 9. Section 6 empowers the Government, with the concurrence of the Chief Justice of the Bombay High Court to constitute one or more designated courts in the cadre of a District and Sessions Judge for such area or areas or for such case or class or group of cases, as may be specified in the notification. Thereupon, under sub-section (2) of section 6, no court shall have jurisdiction in respect of any matter to which the provisions of the Act apply, and all pending cases stand transferred to the designated court. The powers of the designated court are set out in section 7 of the Act. Sub-section (1) of section 7 requires the designated court on receipt of an application to issue to the financial establishment or to any other person whose property is attached and vested in the competent authority, a notice to show cause as to why the order of attachment should not be made absolute. A notice has also to be issued to all other persons who are represented the court as having or being likely to claim, any interest or title ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial establishment" in section 2(d) covers even non-banking financial companies and all other companies save and except for those which are controlled by the State Government and banking companies which fall within the purview of the Banking Regulation Act, 1949. It was submitted that under entry 93 of the Union List Parliament can enact legislation in respect of offences against laws with respect to any of the matters contained in List I. Entry 32 of the State List relates to the incorporation, regulation and winding up of corporations, other than those specified in List I, and hence the State Legislature is denuded of competence in respect of the incorporation, regulation and winding up of those corporations which fall within entries 43 and 44 of the Union List. In the exercise of its legislative power, Parliament has enacted the provisions of sections 58A, 58AA and 58AAA of the Companies Act, 1956 to regulate the repayment of deposits, empower the Company Law Board to direct repayment and constitute offences out of non-compliance. Parliament similarly amended the Reserve Bank of India Act, 1934 to incorporate provisions in Chapter III-B in relation to non-banking financial com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by defaults in the repayment of deposits, it was submitted that the legislation was referable to entry 1 of List II. Hence, it was submitted that the legislation, in pith and substance, relates to public order and that the encroachment upon entries 43 and 44 of the Union List is only incidental. In the alternative, it was submitted that even if the court was of the view that the legislation was unconstitutional in its application to companies and NBFCs, the validity of the Act could be sustained in its application to individuals and unincorporated bodies. In sum and substance, therefore, the submission on the part of the State is that the Act was enacted to deal with and control fraudulent defaults in the repayment of deposits where far fetched schemes were floated by promoters with no possibility of a commercially viable venture that was capable of refunding deposits or of performing the services which were promised. Hence, the law enacted by the State was neither a law in relation to banking under entry 45 of List I or on the incorporation, regulation and winding up of corporations falling within the purview of entries 43 and 44 of the Union List. Entries in the Seventh Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members. Sub-section (2) of section 58A contains a prohibition on companies inviting any deposit (i) save and except in accordance with the rules made by the Central Government in sub-section (1); (ii) unless an advertisement reflecting the financial position of the company has been issued in the prescribed form and manner; and (iii) unless there is no default by the company in the repayment of any deposit together with interest in accordance with the terms and conditions governing the deposit. Under clause (a) of sub-section (3) every deposit accepted by a company at the commencement of the Amending Act of 1974, in accordance with the directions of the Reserve Bank of India under Chapter III-B of the Reserve Bank of India Act, 1934, became liable to be repaid in accordance with the terms and conditions of the deposit unless renewed. If a deposit was received by a company in contravention of the directions of the Reserve Bank of India under Chapter III-B of the Reserve Bank of India Act, 1934, before the commencement of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er made by the Tribunal under sub-section (9) shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of not less than rupees five hundred for every day during which such non-compliance continues." 19. The provisions of section 58A have been amended by Parliament in 1977, 1988, 1996, 1999, 2000 and in 2002 generally for incorporating provisions to make the law stringent. Clause 9 on the Notes on Clauses relating to the amendment of 1988 was, inter alia, as follows (see [1987] 62 Comp. Cas. (St.) 116) : "As a measure of protecting the interests of depositors, this clause provides for compulsory repayment of deposits unless renewed in the manner specified. It is intended to empower the Company Law Board to take cognizance of any case of non-payment of deposits on maturity and to provide adequate relief to the depositors. Non-compliance of the orders of the Company Law Board would attract penalty. A certain number of depositors, or depositors holding specified percentage of the total deposits due for payment, may seek relief from the Company Law Board on the company's failure to make repayment provided in law." 20. The Notes on Clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum not exceeding twenty thousand rupees in a company and to include his successors, nominees and legal representatives. Sub-section (9) of section 58AA creates an offence where there is a failure to comply with an order of the Company Law Board. The offence is punishable with imprisonment which may extend to three years and with a fine of not less than five hundred rupees for every day on which non-compliance continues. Every person who was a director of the company is deemed to be guilty of the offence under sub-section (10) of section 58AA. By virtue of the provisions of section 58AAA, every offence connected with or arising out of the acceptance of deposits under section 58A or section 58AA is deemed to be a cognizable offence under the Code of Criminal Procedure, 1973. The legislative power of Parliament and section 58A 22.: The constitutional validity of section 58A was challenged before the Supreme Court in Delhi Cloth & General Mills Co. Ltd.'s case (supra). A Bench of three learned judges of the Supreme Court repelled the challenge, inter alia, to the legislative competence of Parliament to enact the legislation. It was urged before the Supreme Court that when a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssarily keep in view the mischief which the Legislature seeks to remedy." 24. The law enacted by Parliament, incorporating the provisions of section 58A, is in pursuance of the comprehensive power that is conferred upon Parliament by article 246(1) read with entries 43 and 44 of List I to regulate corporations which fall within the scope and purview of the aforesaid entry. Section 58A(3A) mandates that every deposit accepted by a company must be repaid in accordance with the terms and conditions of the deposit. Sub-section (5) of section 58A creates a criminal offence where a company "omits or fails" to repay the deposit. The expression "omits or fails" is wide enough to cover every default, even a fraudulent default on the part of a company. Under clause (b) of sub-section (5) of section 58A every officer of the company who is in default is liable to be punished with imprisonment which may extend to five years and to the payment of fine. Sub-section (9) of section 58A empowers the Company Law Board to direct the company to make repayment of a deposit where it has failed to repay any deposit or part thereof in accordance with the terms and conditions governing the deposit. A failu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operative society owned and controlled by the State or Central Government or a banking company. This analysis, therefore, makes it abundantly clear that there is a substantial overlapping between the sanctions which are imposed by the State Act with those which have been provided for in the Central legislation enacted in the form of sections 58A and 58AA of the Companies Act, 1956. The State Act goes on to make provisions in section 4 for the attachment of properties in the event of a failure to return a deposit on maturity or on demand or to pay interest or to provide a service that was promised against a deposit. Similarly, when the Government has reason to believe that a financial establishment is acting in a calculated manner detrimental to the interest of the depositors with an intention to defraud them and if it is satisfied that such financial establishment is not likely to return the deposit or make payment of interest or other benefits that were assured, an order of attachment can be passed attaching the money or the property believed to have been acquired by the financial establishment. The designated court in section 7(4) is empowered to issue directions for realisation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that it is in the public interest to do so or to regulate the financial system or to prevent the affairs of an NBFC being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to its own interest. Section 45MC(1)(d) empowers the Reserve Bank to file an application for winding up of an NBFC inter alia where it is unable to pay its debts or where its continuance is detrimental to the public interest or to the interest of the depositors. 27. Wide ranging provisions have been incorporated in Chapter III-B under which the Reserve Bank of India exercises regulatory powers over NBFCs. Section 45Q gives overriding force to Chapter III-B notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Section 45QA empowers the Company Law Board to order an NBFC to repay a deposit in accordance with the terms and conditions governing such deposit, in the event of a failure to do so. Section 45QA is as follows : "45QA. Power of Company Law Board to order repayment of deposit.- (1) Every deposit accepted by a non-banking financial company, unless renewed, shall be repaid in accordance with the terms and condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case (supra). A Division Bench consisting of Chief Justice Rajinder Singh and Mrs. Justice Leila Seth held that Parliament had legislative competence to enact the provisions of Chapter III-C. The Delhi High Court noted that the main business of the petitioners before the court was of accepting deposits, advancing monies to the public and to those in trade and industry. "Banking" in the Banking Regulation Act, 1949 is defined to mean the accepting of deposits for the purposes of lending or investigation of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. But for the absence of facilities to withdraw by cheque and drafts, the definition of "banking" in the 1949 Act applied to the activities carried on by the petitioners. The court noted that the business of accepting of deposits by the petitioner was akin to banking, and fell within the purview of entry 45 ("banking") in List I of the Seventh Schedule. It was urged before the Delhi High Court that the subject of Chapter III-C of the Reserve Bank of India Act, 1934, fell within the purview of entry 32 of the State List, namely, "unincorporated trading". The cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the Delhi High Court. Public order : Construing entry 1 List II : 34. Counsel appearing on behalf of the State Government has submitted that the law in question is within the competence of the State Legislature since it is relatable to public order within the meaning of entry 1 of List II of the Seventh Schedule. Entry 1 of the State List is in the following terms : "1. Public order (but not including the use of any naval, military or air force or any other armed force of the Union or of any other force subject to the control of the Union or of any contingent or unit thereof in air of the civil power." 35. On behalf of the petitioners extensive reliance is sought to be placed on the decisions of the Supreme Court insofar as they explain the ambit of the expression "public order" in article 19(2) of the Constitution. Whether the ambit of the expression "public order" in article 19(2) of the Constitution can be applied ipso facto while construing public order as a legislative head in entry 1 of List II will be considered shortly hereafter. But before that, it would be apposite to deal with some of the seminal precedents which define the content of the expression "public o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinguished from those cases where a restriction on personal liberty is sought to be imposed on the ground of public order. The judgments in Lakhi Narayan Das's case (supra), Romesh Thappar's case (supra) and the later judgment in Brij Bhushan v. State of Delhi AIR 1950 SC 129, were cited before the court. In Brij Bhushan's case (supra), Mr. Justice Fazl Ali held that "public order" was wide enough to cover small disturbances of the peace which do not jeopardise the security of the State and the learned judge paraphrased the words "public order" as "public tranquility". In the judgment in Ram Manohar Lohia's case (supra), Mr. Justice Hidayatullah noted that these three decisions "dealt with the meaning in the legislative Lists as to which, it is settled, we must give as large a meaning as possible." This distinction is one of cardinal importance. Restrictions on the facets of personal liberty guaranteed by article 19(1) of the Constitution, are contemplated on the grounds enumerated in article 19(2) to 19(6). Restrictions on the ground of public order are contemplated in article 19(2), article 19(3) and article 19(4) on the right to freedom of speech and expression, the fundamental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fers upon Parliament the exclusive power to make laws with respect to any of the matters enumerated in List I of the Seventh Schedule, notwithstanding anything in clauses (2) and (3). Similarly, under clause (2) of article 246, Parliament and, subject to clause (1), the Legislature of the State have power to make laws with respect to any of the matters enumerated in List III, notwithstanding anything in clause (3). The power of the Legislature of the State is to make laws for such State with respect to any of the matters in List II subject to clauses (1) and (2) of article 246 of the Constitution. 40. The entries which are contained in the Union List, the State List and the Concurrent List in the Seventh Schedule to the Constitution are legislative heads or fields of legislation. They demarcate, as was noted by the Supreme Court in Calcutta Gas Co. (Proprietary) Ltd. v. State of West Bengal AIR 1962 SC 1044, the area over which the Legislature can operate. The entries in the three lists must be given the widest amplitude. Some of the entries may seem to overlap and often times may appear to be in conflict. It is then the task of the court to reconcile the entries and to embark upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he words "notwithstanding" and "subject to" are important and give primacy to the central legislative power. These principles have been reiterated in a recent judgment of the Supreme Court in Prof. Yashpal v. State of Chhattisgarh [2005] 5 SCC 420. 41. The doctrine of pith and substance has an interesting origin. Latham, C.J. while speaking for the High Court of Australia in Bank of New South Wales v. Commonwealth [1947-48] Commonwealth Law Reports, vol. 76, p. 184, traced the origin of the doctrine from "pith and marrow" in patent law. The learned judge noted thus : "... the phrase 'pith and substance' ... is a metaphorical phrase possibly derived from 'pith and marrow' in patent law. Wills, J. in Incandescent Gas Light Co. v. De Mare Incandescent Gas Light System Ltd. (3) said of the latter phrase :-'Pith' is a great deal less than the substance of the vegetable structure of which it is part, and 'marrow' a great deal less than the substance of the animal structure of which it is part. Metaphors are very apt to mislead, as they are seldom close enough to the things to which they are applied. The difference, if any, between 'pith' and 'substance' is not explained." 42. The doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he attached assets and by equitable distribution between depositors. The Act creates offences and provides for punishment of those offences in section 3. The law enacted by the State Legislature is essentially a law which defines an offence with reference to a fraudulent default in the repayment of deposits. The law cannot, in pith and substance, be read and regarded as a law with reference to public order. 45. Two decisions of the Supreme Court elaborate upon the genesis and content of a law relating to public order. In State of Rajasthan v. G. Chawla AIR 1959 SC 544, the Supreme Court dealt with the Ajmer (Sound Amplifiers Control) Act, 1953. The Act was successfully impugned before the Judicial Commissioner of Ajmer who held that it was in excess of the powers conferred on the State Legislature under section 21 of the Government of the Part C States Act, 1951, and, therefore, ultra vires the State Legislature. Entry 31 of the Union List inter alia deals with broadcasting and other like forms of communication. The Supreme Court held that amplifiers are instruments of broadcasting and even of communication, and hence fall within the ambit of entry 31 of the Union List. The manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the right of freedom of religion guaranteed by articles 25 and 26 of the Constitution is expressly made subject to public order, morality and health, and that it cannot be predicated that freedom of religion can have no bearing whatever on the maintenance of public order or that a law creating an offence relating to religion cannot under any circumstances be said to have been enacted in the interests of public order. It has been held that these two articles in terms contemplate that restrictions may be imposed on the rights guaranteed by them in the interests of public order. Reference may as well be made to the decision in Arun Ghosh v. State of West Bengal AIR 1970 SC 1228 where it has been held that if a thing disturbs the current of the life of the community, and does not merely affect an individual, it would amount to disturbance of the public order. Thus if an attempt is made to raise communal passion, e.g., on the ground that some one has been 'forcibly' converted to another religion, it would, in all probability, give rise to an apprehension of a breach of the public order, affecting the community at large. The impugned Acts therefore, fall within the purview of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted, addressed a letter to the Chief Secretary to the State Government on August 12, 1998, requesting that a suitable legislation can be considered on the model of the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997. Again it was submitted that a Division Bench of this Court had in Kirit Somaiya v. SEBI [1999] 2 LJ 223 and in SEBI v. Libra [1998] 4 LJ 421, adverted to a "mushrooming" of companies which had defrauded investors. This background cannot, however, sustain the legislation once the court comes to the conclusion that there is a clear want of legislative power in the State Government. The State cannot carve out an area of legislation that falls in the Union List on the supposed hypothesis that the legislation enacted by Parliament is not effective. A resource to the supposed inefficacy of a law enacted by Parliament must lie to Parliament. In P. N. Krishna Lal v. Govt. of Kerala [1995] Suppl. (2) SCC 187, the State Legislature amended the provisions of the Kerala Abkari Act so as to impose penal sanction for adulterating liquor or intoxicating drugs with noxious substances and to provide for the payment of compensation. The Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the power of the State. What is incidental is not of constitutional significance; this is so not because the incident is an aberration but because the incident is not of such overarching significance as to be determinative of the true character of the law. Subjects of legislative power are not defined by boundaries constructed with iron fences. The boundaries are open textured and porous; in their peripheries they may possess common attributes or characteristics. The vice of the State law in this case is that its core has transgressed into a field reserved for Parliament. The transgression of the core into the Parliamentary domain is ever clearer when one has regard to legislation enacted by Parliament. In relation to corporate entities, the State law penalises a species of default-a fraudulent failure to repay-which is clearly within the purview of the sanctions imposed by the Companies Act, 1956. The State law regulates by imposing penal sanctions on transactions which Parliament has regulated by the imposition of sanctions. The penalties which the State law envisages are at variance with what Parliament envisaged. Provisions have been made in the State law for attachment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). The judgment of the Delhi High Court is affirmed by the Supreme Court in T. Velayudhan Achari's case (supra); (ii) The Supreme Court held that Parliament has legislative competence to enact section 58A of the Companies Act, 1956 and that the provision was relatable to the legislative heads contained in entries 43 and 44 of List I of the Seventh Schedule. The same principle of law must apply to the subsequent amendments to the Companies Act, 1956 by which the provisions of section 58AA and section 58AAA were introduced; (iii) The legislative competence of Parliament to enact Chapter III-C of the Reserve Bank of India Act, 1934 was upheld by the Delhi High Court with reference to the provisions of entry 45 of List I and at any rate with reference to entry 97 of List I. The reasoning of the Delhi High Court has been affirmed by the Supreme Court. Hence, it would not be possible for this court to hold that legislation regulating deposits in relation to unincorporated entities and individuals, is referable to a legislative head in the State List; (iv) The legislation enacted by the State Legislature in the present case directly conflicts with the provisions contained in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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