KK Bhaskaran v. State of Tamil Nadu

The court in this case discusses the constitutionality of Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997

Introduction

There has been a large growth of the financial establishments not registered with the Reserve Bank of India in our country. These establishments have often duped innocent citizens who deposited their money in them lured by the offer of the high interest rate. The number of such incidents has been on a constant rise.

Therefore, the state legislature of Tamil Nadu enacted the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997[1] in order to protect the citizens from such fraudulent activities by the financial establishments.

The term financial establishment under the Tamil Nadu act simply means a company registered under the companies act “”carrying on the business of receiving deposits under any scheme or arrangement or any other manner”.”

In 2011, in the case of KK Baskaran vs Tamil Nadu[2], the apex court examined the constitutionality of this act.

Facts

An appeal was filed in the Supreme Court against the order of a full bench judgment of Madras High Court which had held that Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997 is constitutional. The appeal argued the act to be unconstitutional on the grounds of legislative competence as well as that it violates article 14, 19(1) (g) and 21 of the constitution. The case was heard ex parte.The appeal was dismissed by the high court, and the constitutionality of the act was upheld.

Arguments

Appellant’s argument:

  1. The first argument put forth by the appellant is that the act is beyond the legislative competence of the state legislature because it falls under entry 43, 44 and 45 of the list one of the seventh schedule of the constitution. Hence the act should be struck down because “”Reserve Bank of India Act, 1934[3], Banking Regulation Act, 1949[4], the Indian Companies Act, 1956[5] and the Criminal Law Amendment Ordinance, 1944[6] as made applicable by Criminal Law (Tamil Nadu Amendment) Act, 1977″[7]“already serve the purpose. The counsel relied on the judgment of Vijay C. Punjal vs. State of Maharashtra[8] delivered by full bench of the Bombay High Court in which a similar act called the Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999[9] was declared unconstitutional.
  2. The counsel for appellant also contented that this act is unreasonable and arbitrary and violates article 14, 19(1) (g) and 21 of the constitution.

Summary of the Judgment

The Supreme Court bench comprising of Justice MarkandeyKatju and GyanSudha Mishra did not find any merit in the appeal and dismissed it with the following reasons-

  1. First of all, the court referred to the statement of objects and other provisions of the act. The court said that the object of the act is to protect the thousands of people who have invested their money into financial establishments due to the offer of higher rate of interest and the act is not focus on banking transaction or acceptance of deposits. The act states that it covers financial establishment other than the ones covered by Reserve Bank of India Act, 1934.[10] The act provides for the attachment of the properties of the financial establishment as well as of the mala fide transferees so that these properties can be brought to sale in order to pay the dues of depositors speedily. It also declares no payment of interest or failure to render services to the depositors as an offence.
  2. With the above reasoning the court also stated that as per the doctrine of pith and substance, the Tamil Nadu Act fell  under entries 1, 30 and 32 of the second list of the seventh schedule of the constitution.
  3. The court took the view of the Vijay C. Punal case and Delhi Cloth Mills Ltd vs. Union of India case[11]referred by the appellant and disagreed by with their judgment. Bombay High Court had taken the view that the act falls into the legislative powers of the parliament. SC disagreed that this act falls under Section 58A of the Companies Act[12].
  4. The court said that the act pith and substance fall under the state list. It stated that sometimes clear demarcation is not possible and some overlapping cannot be prevented, for which the court relied on the judgment of ITC Ltd. vs State of Karnataka.[13]The court stated that powers to a legislature under the pith and substance doctrine could not be held invalid merely because it encroaches upon the powers of another legislature. It further stated that if it is found that a particular power falls under the ambit of a legislature is cannot be invalid even though it trenches upon matters outside its legislative competence by relying on Union of India vs. Shah Goverdhan L. Kabra Teachers’ College[14]
  5. The court also stated that for applying pith and substance, the act has to be read as a whole with its object, scope and effect of provision according to  Bharat Hydro Power Corporation vs. State of Assam[15]. And for this purpose, the entries of the seventh schedule have to be given the widest meaning possible.
  6. The court also said that the financial companies under the act did not have a license issued by Reserve Bank of India and hence do not come under the ambit of the Reserve Bank of India Act, 1934 nor the Banking Regulation Act, 1949.
  7. The court further said that the doctrines of occupied field or repugnancy have no application in this case.
  8. Lastly, the court states that the act does not at all violates article 14, 19(1)(g) or 21 of the constitution[16] rather it provides a remedy for a great evil of the society.

Analysis

The court has been rightly justified in ruling that the Tamil Nadu Act is constitutional because each year thousands of people fall prey to the non-banking financial establishments which lure them to deposit money for higher rate of interest.

Relying upon the judgment of this case, the Supreme Court also upheld the validity of Maharashtra Protection of Depositors Act in the case Joshi and others vs. State of Maharashtra.[17]

The court said that the act does not fall within entries 43, 44 and 45 of the seventh schedule as contended by the appellant.

These entries include “”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””

While the meaning of ‘financial ‘establishments’under this act is that “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 X of 1949)”

Hence, it is clear that the financial establishments under this act do not fall under entries 43, 44 and 45 of the constitution.

The court states that the act falls under powers given in entries 1, 30 and 32 of the second list which state that 1. Public order (but not including 3 [the use of any naval, military or air force or any other armed force of the Union or of any other force subject to the control of the Union or of any contingent or unit thereof] in aid of the civil power).

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

These provisions appear to be providing more of legislative authority to the state legislature. Hence, it very clear that the court accurately stated that these financial establishments fall under the ambit of state list and hence, is within the legislative competence of the state legislature.

But the court also took in the view the fact that there appears to be some overlapping between the provisions of the first list and second list and hence, they also proved with the case laws that if a subject is within the legislative competence of a legislature, a little overlapping willnot render it invalid.

The appeal challenge the act on the grounds of some provisions of the companies act. The court stated that these grounds of challenge have no merit. The courtvery clearly stated that section 58a of the companies act[18] talk about the conditions under which deposits can be made whereas the Tamil Nadu act does not talks about depositing and receiving of money rather it provides a safeguard and remedy to those people who deposited their money in a financial establishment which is now unable to pay interest, render services or pay dues.

This judgment was also relied upon in the case of New Horizon Sugar Mills vs Gov.Of Pondicherry.[19]

Three similar acts – the Tamil Nadu act, Pondicherry act and the Maharashtra Act have been enacted for the same purpose of protecting the interest of small depositors from unscrupulous financial establishments.

This decision was also relied upon in the case of Soma Suresh Kumar vs. Government of Andhra Pradesh and others.[20]Where the court discussed the essentiality to protect the depositors and investors duped by financial establishments in the name of higher interest. The court in this case also discussed and stressed upon the fact that the Tamil Nadu act is constitutional and well within the legislative competence of state legislature.

In the case Sonal Hemant Joshi and others vs. State of Maharashtra[21] also the court reiterated that the object of Tamil Nadu Act is not focussed on acceptance of deposits or any kind of banking transactions but aim at providing a remedy to depositors who have been fooled by fraudulent financial establishments.

The court also stated that the conventional legal proceedings couldcause a lot of time and money to the parties and hence this act functions to provide speedy remedy to the victims.

Conclusion

From the above observations, it has been made certain that the Tamil Nadu Act is completely constitutional and very important in order to provide speedy justice to those who have been deceived. These acts were enacted because the legislature noticed that there exists a pattern of duping unsuspecting investors for money in return for big promises of high interest. People invest their lifesavings in these establishments, and their concerns and rights need to be kept in mind while examining the vires of this provision. Therefore, it felt a need for an act which can protect the position of investors by providing provision for attachment of property and digging money out of these establishments.

Also read Role of Judiciary in Maintaining Rule of Law


[1] Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997.

[2]K KBhaskaran v. State of Tamil Nadu, AIR 2011 SC 1485.

[3] Reserve Bank of India Act, 1934.

[4] Banking Regulation Act, 1949.

[5] Indian Companies Act, 1956.

[6] Criminal Law Amendment Ordinance, 1944.

[7] Criminal Law (Tamil Nadu Amendment) Act, 1977.

[8]Vijay C. Punjal vs. State of Maharashtra, (2005) 64 SCL 589.

[9]Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999.

[10]Reserve Bank of India Act, 1934

[11] Delhi Cloth Mills Ltd vs. Union of India , (1983) 4 SCC 166. 

[12]Indian Companies Act, 1956, § 58A.

[13]ITC Ltd. vs. State of Karnataka, (1998) 109 STC 26 (Karn).

[14]Union of India vs. Shah Goverdhan L. Kabra Teachers’ College, (2002) 8 SCC 228.

[15]Bharat Hydro Power Corporation vs. State of Assam, (2004) 4 SCC 489.

[16] INDIA CONST. art. 14, 19(1) (g) and 21.

[17]Joshi and others vs. State of Maharashtra, (2005) 4 CTC 705.

[18]Indian Companies Act, 1956, § 58A.

[19]New Horizon Sugar Mills vs Gov.Of Pondicherry, (2012) 10 SCC 575.

[20]Soma Suresh Kumar vs. Government of Andhra Pradesh and others, (2013) 10 SCC 677.

[21]Sonal Hemant Joshi and others vs. State of Maharashtra, 2012 (10) SCC 601.