K.K. Baskaran Vs State
rep. by its Secretary, Tamil Nadu & Ors.
J U D G M E N T
condoned. Leave granted.
learned counsel for the appellant.
swindling and duping of gullible investors/depositors is not unique to India. It
has been referred to in Charles Dicken's novel `Little Dorrit', in which Mr.
Merdle sets up a Ponzi scheme resulting in loss of the savings of thousands of depositors
including the Dorrits and Arthur Clennam. In recent times there have been many
such scandals e.g. the get-rich-quick scheme of the scamster Bernard Madoff in
which the estimated losses of investors were estimated to be 21 billion
present case illustrates what has been going on in India for quite some time. Non-banking
financial companies have duped thousands of innocent and gullible depositors of
their hard earned money by promising high rates of interest on these deposits, and
then done the moonlight flit, often disappearing into another State or even
foreign countries leaving the depositors as well as the State police high and
appeal has been filed against the impugned judgment and order of the Full Bench
of the Madras dated 02.03.2007 in writ petition No. 26108/2005.
means of the aforesaid writ petition, the petitioner and others challenged the constitutional
validity of the Tamil Nadu Protection of Interests of Depositors (in Financial
Establishments) Act, 1997 (for short the Tamil Nadu Act). By the impugned
judgment the Full Bench of the Madras High Court has held the aforesaid Act to be
constitutional. Hence, this appeal.
counsel for the appellant has relied on the Full Bench decision of the Bombay High
Court in Vijay C. Punjal vs. State of Maharashtra (2005) 4 CTC 705 by which a
similar Act of Maharashtra , being the Maharashtra Protection of Interests of Depositors
(in Financial 3Establishments) Act, 1999 was held to be unconstitutional. We
are of the opinion that the impugned judgment of the Full Bench of the Madras
High Court is correct, while the judgment of the Full Bench of the Bombay High Court
in Vijay's case (supra) is not correct.
main submission of the learned counsel for the appellant in challenging the Tamil
Nadu Act, which was also the main submission in challenging the Maharashtra
Act, 1999, was that the said Act is beyond the legislative competence of the
State Legislature as it falls within entries 43, 44 and 45 of List I of the
Seventh Schedule to the Constitution. It was also submitted that the impugned
Act is liable to be struck down as the field of legislation is already occupied
by legislation of Parliament being the Reserve Bank of India Act, 1934, Banking
Regulation Act, 1949, the Indian Companies Act, 1956 and the Criminal Law
Amendment Ordinance, 1944 as made applicable by Criminal Law (Tamil Nadu
Amendment) Act, 1977. It was also contended that the Tamil Nadu Act was
arbitrary, unreasonable and violative of Articles 14, 19(1)(g) and 21 of the
are of the opinion that none of these submissions have any merit.
perusal of the Statement of Objects as well as the relevant provisions of the
Tamil Nadu Act shows that its object was to ameliorate the situation of thousands
of depositors from the clutches of financial establishments who had duped the
investor public by offering high rates of interest on deposits and committed deliberate
fraud in repayment of the principal and interest after maturity of such
deposits. The Act provides for measures for attachment of the properties of the
financial establishments as well as mala fide transferees and to bring these properties
for sale for realization of the dues payable to the depositors speedily.
per the statistics of July 2002, about Rs. 1945 crores were collected from over
19 lakhs of depositors. These depositors were either poor or middle class
persons, retired government servants and pensioners and their dependants,
senior citizens or economically backward sections of society etc. The deposits
were either siphoned off or diverted mala fide by these fraudulent financial
establishments. The commission and omission of these financial establishments was
well-organized, and constitute an organized systematic white color crime which jeopardizes
the safety and interest of the public.
noted in the impugned judgment, the Tamil Nadu Act was not focused on the transaction
of banking or acceptance of deposits, but it is designed to protect the public
from fraudulent financial establishments who defraud the public by offering lucrative
returns on deposits and then disappear with the depositors' money or refuse to return
the same with interst. In our opinion, the impugned Tamil Nadu Act is in pith and
substance relatable to Entries 1, 30 and 32 of the State List (List II) of The Seventh
Statement of Objects And Reasons of the Tamil Nadu Act states : "There is
mushroom growth of Financial Establishments not covered by the Reserve Bank of India
Act, 1934 (Central Act II of 1934) in the State in the recent past with the sole
object of grabbing money received as deposits from the public, mostly middle
class and poor, on the promise of unprecedented high rates of interest and
without any obligation to refund the deposits to the investors on maturity. Many
of these Financial Establishments have defaulted to return the deposits on maturity
to the public running to crores of rupees and thereby inviting the public
resentment, which created law and order problems in the State. The Government
has, therefore, decided to undertake suitable legislation , in the public interest,
in order to regulate the activities of such Financial Establishments, other
than those covered by the Reserve Bank of India Act, 1934 (Central Act II of 1934).
2. The Bill seeks to give effect to the above decision."
reading of the Statement of Objects and Reasons of the Tamil Nadu Act would go to
show that it does not concentrate on incorporation, regulation or winding up of
banking corporations but, on the other hand, is basically concerned with
returning money of the gullible depositors who had been defrauded. The words
found in the Statement of Objects and Reasons, viz., "in the public interest,
in order to regulate the activities of such Financial Establishments" would
mean that the Tamil Nadu Act has been enacted to protect the interests of
amendment was brought to the Tamil Nadu Act by the Protection of Interests of Depositors
(In Financial Establishments) Amendment Act, 2003, Tamil Nadu Act 30 of 2003,
the object being: "The Tamil Nadu Protection of Interest of Depositors (in
financial establishments) Act, 1977 (Tamil Nadu Act 44 of 1997) was enacted by
the Government of Tamil Nadu to protect the interest of the depositors who have
lost their hard earned money with the financial institutions. At present, there
is no provision in the said Act for attaching the properties of the persons who
borrowed money from the financial establishments and for the sale of attached
property in public action and for the equitable distribution of the sale proceeds
to the depositors. In order to overcome the shortcomings and to make the said Tamil
Nadu Act 44 of 1997 more effective, the Government have decided to amend the
said Act so as to- 7 (1) bring a company registered under the Companies Act, 1956
(Central Act 1 of 1956) and non- banking financial company within the purview
of the Act; (2) make the non-payment of interest and failure to render service
for which deposit has been made, as offences under the Act; (3) attach the properties
of the person who has borrowed money from the financial establishments and
failed to return the money; (4) appoint more than one competent authority under
the Act; (5) constitute Special Courts for different areas and for different cases
and to appoint Special Public Prosecutors for each of the Special Courts; (6)
specify the time limit within which the Special Court shall pass the final
order; (7) compound the offences punishable under the Act; and (8) to sell the
attached properties in public auction and to distribute the sale proceeds among
the depositors. 2. The Bill seeks to give effect to the above decision."
section 2 of the Tamil Nadu Act 30 of 2003, the definitions of "deposit"
and "financial establishments" were amended as follows: 8 (1)....... (2)
" deposit means the deposit of money either in one lump sum or by installments
made with financial establishments for a fixed period, for interest or for
return in any kind or for any service; (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 X of
by the Amendment Act 30 of 2003, the companies registered under the Companies
Act, 1956 and the non banking financial companies, were also brought within the
purview of the Act.
counsel for the appellant relied on the Full Bench decision of the Bombay High
Court in Vijay C. Punjal's case (supra) in support of his contention that the Tamil
Nadu Act, like the Maharasthra Act, was unconstitutional being beyond the legislative
competence of the State Legislature. We do not agree. 9
have carefully perused the judgment of the Full Bench of the Bombay High Court in
Vijay's case (supra) and we respectfully disagree with the view taken by the
Bombay High Court.
may be noted that though there are some differences between the Tamil Nadu Act
and the Maharashtra Act, they are minor differences, and hence the view we are taking
herein will also apply in relation to the Maharashtra Act.
Bombay High Court has taken the view that the Maharashtra Act transgressed into
the field reserved for Parliament. We do not agree. It is true that Section 58A
of the Companies Act has been upheld by this Court in Delhi Cloth Mills Ltd vs.
Union of India (1983) 4 SCC 166 and the provisions of Chapter IIIC of the Reserve
Bank of India Act, 1934 was upheld by this Court in T. Velayndhan Achari vs.
Union of India (1993) 2 SCC 582. However, we are not in agreement with the Full
Bench decision of the Bombay High Court that the subject matter covered by the
said Act falls squarely within the subject matter of Section 58A and 58AA of the
are of the opinion that the impugned Tamil Nadu Act enacted by the State
Legislature is not in pith and substance referable to the legislative heads
contained in List I of the Seventh Schedule to the Constitution though there
may be some overlapping. In our opinion, in pith and substance the said Act comes
under the entries in List II (the State List) of the Seventh Schedule.
often happens that a legislation overlaps both Lists I as well as List II of
the Seventh Schedule. In such circumstances, the doctrine of pith and substance
is applied. We are of the opinion that in pith and substance the impugned State
Act is referable to Entries 1, 30 and 31 of List II of the Seventh Schedule and
not Entries 43, 44 and 45 of List I of the Seventh Schedule.
is well-settled that incidental trenching in exercise of ancillary powers into
a forbidden legislative territory is permissible vide Constitution Bench decision
of this court in State of West Bengal etc. vs. Kesoram Industries Ltd & Ors
etc. (2004) 10 SCC 201 (vide paras 31(4), (5) and (6) and 129 (5). Sharp and
distinct lines of demarcation are not always possible and it is often
impossible to prevent a certain amount of overlapping vide ITC Ltd. vs. State
of Karnataka, 1985 (Supp) SCC 476 (para 17). We 1have to look at the
legislation as a whole and there is a presumption that the legislature does not
exceed its constitutional limits.
`financial companies' in the present case had not obtained any licence from the
Reserve Bank of India. Hence they are not governed by the Reserve Bank of India
Act nor the Banking Regulation Act, 1949.
doctrine of pith and substance means that an enactment which substantially
falls within the powers expressly conferred by the Constitution upon a Legislature
which enacted it cannot be held to be invalid merely because it incidentally
encroaches on matters assigned to another legislature. The Court must consider what
constitutes in pith and substance the true subject matter of the legislation. If
on such examination it is found that the legislation is in substance one on a
matter assigned to the legislature then it must be held to be valid even though
it incidentally trenches on matters beyond its legislative competence vide Union
of India vs. Shah Goverdhan L. Kabra Teachers' College (2002) 8 SCC 228 (vide
applying the doctrine of pith and substance regard is to be had to the
enactment as a whole, its main objects and the scope and effect of its provisions
vide Bharat Hydro Power Corporation vs. State of Assam (2004) 4 SCC 489 (vide
this purpose the language of the Entries in the Seventh Schedule should be
given the widest scope of which the meaning is fairly capable vide State of West
Bengal vs. Kesoram Industries Ltd (supra) (para 31(4), Union of India vs. Shah Goverdhan
Kabra Teachers College (supra) (para 6), ITC Ltd. vs. State of Karnataka
(supra) (para 17).
counsel for the appellant submitted that the subject-matter of the Tamil Nadu
Act being banking, falls within the legislative competence of Parliament under
Entry 45 of List I. We do not agree. Admittedly, none of the financial
companies in question obtained any licence from the Reserve Bank of India. Hence
they are not governed by the Reserve Bank of India Act or the Banking Regulation
Act. The activities of these financial companies do not, in our opinion, come within
the meaning of the term `banking' as defined in the Banking Regulation Act, 1949
or the Reserve Bank of India Act, 1934.
Tamil Nadu Act was enacted to find out a solution for the problem of the depositors
who were deceived on a large scale by the fraudulent activities of certain financial
establishments. There was a disastrous consequence both in the economic as well
as social life of such depositors who were exploited by false promise of high
return of interest. These financial institutions/establishments did not come either
under the Reserve Bank of India Act or the Banking Regulation act, and hence
they escaped from public control.
the impugned Act the State not only proposed to attach the properties of such fraudulent
establishments and the mala fide transferees, but also provided for the sale of
such properties and for distribution of the sale proceeds amongst the innocent
depositors. Hence, in our opinion, the doctrine of occupied field or
repugnancy, has no application in the present case.
object of the Tamil Nadu Act was to give a speedy remedy to the innocent
depositors who were vulnerable to the temptation of earning high rates of interest
and were victimized by the financial establishments fraudulently.
regards Section 58A of the Companies Act, this prescribes the conditions under which
the deposits may be invited or accepted by the companies. On the other hand,
the aim and object of the Tamil Nadu Act is totally different.
Tamil Nadu Act was enacted to ameliorate the conditions of thousands of depositors
who had fallen into the clutches of fraudulent financial establishments who had
raised hopes of high rate of interest and thus duped the depositors. Thus the
Tamil Nadu Act is not focused on the transaction of banking or the acceptance of
deposit, but is focused on remedying the situation of the depositors who were deceived
by the fraudulent financial establishments. The impugned Tamil Nadu Act was intended
to deal with neither the banks which do the business or banking and are
governed by the Reserve Bank of India Act and Banking Regulation Act, nor the
non-banking financial companies enacted under the Companies Act, 1956.
Reserve Bank of India Act, the Banking Regulation Act and the Companies Act do
not occupy the field which the impugned Tamil Nadu Act occupies, though the
latter may incidentally trench upon the former. The main object of the Tamil
Nadu Act is to provide a solution to wipe out the tears of several lakhs of depositors
to realize their dues effectively and speedily from the fraudulent financial
establishments which duped them or their vendees, without dragging them in a legal
battle from pillar to post. Hence, the decision of this Court in Delhi Cloth Mills
(supra) has no bearing on the constitutional validity of the Tamil Nadu Act.
the case of the Tamil Nadu Act, the attachment of properties is intended to provide
an effective and speedy remedy to the aggrieved depositors for the realization
of their dues. The offences dealt with in the impugned Act are unique and have
been enacted to deal with the economic and social disorder in society, caused by
the fraudulent activities of such financial establishments.
Section 3 & 4 of the Tamil Nadu Act, certain properties can be attached,
and there is also provision for interim orders for attachment after which a
post decisional hearing is provided for. In our opinion this is valid in view
of the prevailing realities.
Court should interpret the constitutional provisions against the social setting
of the country and not in the abstract. The Court must take into consideration
the economic realities and aspirations of the people and must further the
social interest which is the purpose of legislation, as held by Justices
Holmes, Brandeis and Frankfurter of the U.S. Supreme Court in a series of
decisions. Hence the Courts cannot function in a vacuum. It is for this reason
that Courts presume in favour of constitutionality of the statute because there
is always a presumption that the legislature understands and 1correctly appreciates
the needs of its own people, vide Govt. of Andhra Pradesh vs. P. Laxmi Devi
(2008) 4 SCC 720.
fail to see how there is any violation of Article 14, 19(1)(g) or 21 of the
Constitution. The Act is a salutary measure to remedy a great social evil. A
systematic conspiracy was effected by certain fraudulent financial establishments
which not only committed fraud on the depositor, but also siphoned off or diverted
the depositor's funds mala fide. We are of the opinion that the act of the financers
in exploiting the depositors is a notorious abuse of faith of the depositors who
innocently deposited their money with the former for higher rate of interest. These
depositors were often given a small pass book as a token of acknowledgment of
their deposit, which they considered as a passport of their children for higher
education or wedding of their daughters or as a policy of medical insurance in
the case of most of the aged depositors, but in reality in all cases it was an
unsecured promise executed on a waste paper. The senior citizens above 80 years,
senior citizens between 60 and 80 years, widows, handicapped, driven out by wards,
retired government servants and pensioners, and persons living below the
poverty line constituted the bulk of the depositors. Without the 1aid of the impugned
Act, it would have been impossible to recover their deposits and interest
conventional legal proceedings incurring huge expenses of court fees,
advocates' fees, apart from other inconveniences involved and the long delay in
disposal of cases due to docket explosion in Courts, would not have made it
possible for the depositors to recover their money, leave alone the interest
thereon. Hence, in our opinion the impugned Act has rightly been enacted to
enable the depositors to recover their money speedily by taking strong steps in
State being the custodian of the welfare of the citizens as parens patriae cannot
be a silent spectator without finding a solution for this malady. The financial
swindlers, who are nothing but cheats and charlatans having no social responsibility,
but only a lust for easy money by making false promise of attractive returns
for the gullible investors, had to be dealt with strongly.
small amounts collected from a substantial number of individual depositors
culminated into huge amounts of money. These collections were diverted in the name
of third parties and finally one day the fraudulent 1financers closed their financial
establishments leaving the innocent depositors in the lurch.
counsel for the appellant submitted that the appellant was only a bona fide
purchaser of some plots of land from one Arun Kumar and Smt. Sulochana, and not
from any financial establishment. We are not going into this question as it can
be raised in appropriate proceedings. In this case we are only concerned with the
constitutional validity of the Tamil Nadu Act.
are of the opinion that there is no merit in this petition. The impugned Tamil
Nadu Act is constitutionally valid. In fact, it is a salutary measure which was
long overdue to deal with these scamsters who have been thriving like locusts
in the country.
Appeal is, therefore, dismissed. No costs.
(Gyan Sudha Misra)