Bombay Money-Lenders Act

Applicability
Section 5 is the main operative section of the Act. It provides that no money-lender can carry out the business of money-lending without a licence for the same. Further, the business must only be carried out in the area for which he has been granted a licence and in accordance with the terms and conditions of such licence. Thus, any business of money-lending without a licence is prohibited by the Act. In order to constitute an offence under the Act, the money-lender must carry on business in an area outside of what has been permitted by his licence – Bhavarlal Pruthviraj Jain v State of Maharashtra, 191 Bom CR 878.

A money lender has been defined to mean any individual, HUF, company, AOP, etc., who carries on the business of money-lending in the State of Maharashtra. However, banks, any financial/other institution notified by the State Government are excluded from the definition of a money-lender.

One of the important restrictions under the Act is the maximum rate of interest which a lender is entitled to charge. This rate is notified from time to time by the State Government. Currently, the maximum rate of interest for loans to any person other than an agriculturist is 18% p.a. in case of secured loans, whereas it is 20% in the case of unsecured loans.

Business of Money-lending
The next question which becomes relevant is that what constitutes a business of money-lending under the Act? The Act defines it to mean the business of advancing loans whether in cash or in kind and whether or not in connection with or in addition to any other business. Thus, two important facets are relevant – (a) there must be advancing of loans; and (b) such advancing must constitute a business.

What constitutes a business has not been defined and hence, useful reference may be made to various decisions under the Income-tax on what constitutes a business. The Supreme Court in the case of Distributors Baroda P. Ltd., 83 ITR 237 (SC) has held that when the Legislature speaks of the business of holding of investments, it refers to a real, substantial and systematic or organised course of activity of investment carried on by the assessee for a set purpose, such as earning profits. If the investments are only made for a collateral purpose, then it cannot be considered as the business of the assessee. A similar reasoning may be applied to the activity of giving loans. Of course, it goes without saying that whether or not a lending constitutes a business, would be driven more by the facts and circumstances of each case. However, some of the relevant factors would be the quantum of loans, frequency and number of transactions, type of borrowers, rate of interest charged, security demanded, organisational set-up of lender, etc.

In the case of Gajanan v. Seth Brindaban AIR 1970 SC 2007, the Apex Court considered as to when could a person be considered to be a money-lender:

“The word ‘regular’ shows that the plaintiff must have been in the habit of advancing loans to persons as a matter of regular business. If only an isolated act of money-lending is shown to the court it is impossible to state that it constitutes a regular course of business. It is an act of business, but not necessarily an act done in the regular course of business……….

………….on its plain reading only prohibits the carrying on of the business of money-lending in any district without holding a valid registration certificate in respect of that district. It does not prohibit and, therefore, does not invalidate an isolated transaction of lending money. Such an isolated transaction seems to us to be outside the rigour of the prohibition.”

What is a Loan?
Advancing of a loan is the prime requirement for a money-lender. Hence, let us examine what constitutes a loan? The Act defines it to mean an advance at interest.

The term interest has been defined under the Act to include, any sum, in excess of the principal paid or payable by a money-lender in consideration of or otherwise in respect of a loan. However, interest does not include any sum lawfully charged by a money-lender for or on account of costs, charges, expenses under this Act / any other Law.

The following transactions are excluded from the definition of the term loan and hence, dealing in them would not constitute a business of moneylending for the lender:

(a) A deposit of money in any Bank or in a Company or a Co-operative Society. Thus, a Company accepting Public Deposits under s.58A of the Companies Act or under the NBFC Directions for Public Deposits would not be covered by the definition of loan.
(b) A loan to or by or a deposit with a Society registered under the Societies Registration Act
(c) Loan advanced by Government or by any local authority
(d) A loan advanced to a Government servant from a fund
(e) A loan advanced by a co-operative society
(f) Advance made to a subscriber or a depositor in a Provident Fund from the amount standing to his credit in the fund
(g) A loan to or by an Insurance Company
(h) A loan to or by or deposit with anybody incorporated by any law for the time being in force in the State
(i) An advance of a sum exceeding Rs 3,000 made on the basis of a hundi
(j) An advance made bonafide by any person carrying on any business not having the primary object of lending money. However, such an advance must be made in the regular course of his business. Whether or not an advance has been made bonafide in the regular course of business is a question of fact. (k) An advance of more than Rs 3,000 made on the basis of a negotiable instrument other than a Promissory Note. This is the most important exception.

Hence, every loan is not covered by the provisions of the Act, since an advance of more than Rs 3,000 made on the basis of a negotiable instrument other than a Promissory Note is excluded – Rajesh Varma v Aminexs Holdings, 2008 (3) Mah. L.J. 460. A negotiable instrument means one defined under the Negotiable Instruments Act, 1881. This Act defines a negotiable instrument to mean “a promissory note, bill of exchange or cheque payable either to order or to bearer.” However, a Promissory Note is expressly excluded. Hence, only if the loan is given on the basis of a cheque or a bill of exchange it would be out of the purview of the Act.

Accordingly, any advance of more than Rs 3,000 made on the basis of a post-dated cheque as a security is out of the purview of this Act – Nandram Kaniram v N.B. Raahtekar, 1994 (1) Bom CR 28; Sitaram Laxminarayan Rathi v Sitaram Kashiram Koli, 1984 (2) Bom CR 92.

Consequences of Not Holding Licence

“I find no difficulty in so also construing section 434(1)(c) to hold that a petition for winding up u/s 433(e), r.w.s. 434(1)(a), would lie only if the debt was legally recoverable. The fact that the present is a company petition and under the Bombay Money-Lenders’ Act, no relief will be granted if the suit is filed would also make the debt unenforceable under the Act. It is no doubt true that a company petition is not a petition for recovery of dues from a company. Nevertheless, to wind up a company u/s 434(1) (a), the amount must be a debt which is legally recoverable. If the recovery itself is barred u/s 10 of the Bombay Money-Lenders’, Act, I am of the opinion, therefore, that in such a case the petition filed on the ground that the company is unable to pay such a debt, would also not be maintainable.”

If a money-lender who does not have a valid licence is in possession of the property of a loan debtor as a security, then the same can be requisitioned and delivered to the loan-debtor.

Several decisions have held that if a valid licence is not held by the money-lender, then the loan ceases to be a legally enforceable debt u/s. 138 of the Negotiable Instruments Act, 1881. Hence, if the debtor pays a cheque to such a lender which subsequently bounces, then the lender is not entitled to file a criminal suit for the cheque bouncing u/s 138 – Mulchand Ramji Saiya v Premji Ratanshi Gangar, Cr. A. No. 5397 of 2010 (Bom); Nanda Dharam Nandanwar v Nandkishor Talakram Thaokar, 2010 ALL MR (Cri) 733; Anil Baburao Kataria v Pursuhottam Prabhakar Kawane, 2010 ALL MR (Cri) 802.

Further, the Act prescribes  a penalty for carrying on the business of money-lending without a valid licence. For the first offence, the punishment is a term of up to one year and/or a fine of Rs. 1,500. For every subsequent offence, the penalty is a term of at least two years.

Does the Law apply to NBFCs?

Banks have been expressly exempted. However, there is no clarity on whether or not the Act applies to NBFCs. Since money-lending is a State subject, different States and their High Courts have taken divergent views. One of the biggest bones of contention is that the State laws establish maximum rates of interest that can be charged by a money-lender whereas, the RBI has not established a ceiling on the rate of interest that can be charged by an NBFC. Some States such as Karnataka have specifically exempted certain NBFCs from the provisions of the Money Lenders Act, while there is a blanket exemption for all NBFCs in Rajasthan.

In Sundaram Finance Ltd, Special Civil Application No. 13163 of 2008 (Order dated 13th January 2010) and in Radhey Estate Developers v Mehta Integrated Finance Co Ltd, Special Civil Application No. 66 of 2010 (Order dated 26 April 2011) the Gujarat High Court ruled that the Bombay Money Lenders Act, as applicable to the State of Gujarat, does not apply to NBFCs which are regulated by the RBI.

However, the Kerala High Court has consistently been taking a view that even NBFCs are covered by the State money lending Act – Link Hire-Purchase and Leasing Co. (Pvt.) Ltd v State of Kerala, 103 Comp. Cas 941 (Ker).

Muthoot Finance Ltd has filed a Special Leave Petition (SLP. No. 14386/2010 on September 07, 2010) before the Supreme Court challenging the order of the High Court of Kerala approving the Order of the Government of Kerala notifying that provisions of the Kerala Money Lenders Act, 1958 which regulated and controlled money lending business in the state of Kerala, was applicable to NBFCs. The matter is currently pending before the Supreme Court.

Auditor’s duty

The Auditor should enquire of the auditee, whether it has complied with the aforesaid provisions in respect of any money-lending transactions executed into by it. In case the Auditor comes across a transaction which does not comply with any provisions of the above Acts, then he will have to consider whether appropriate disclosures should be made in the Notes to Accounts or whether the non-compliance is so material so as to warrant a qualification in his report.

He may insist upon a legal opinion to support any claim which the auditee is making. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is to exercise of ‘due care’ and ‘diligence’.