Repayment of Deposits

One of the most important and easy sources of raising funds for companies and non-banking financial companies has been public deposits. As per statistics from the RBI, as on March 2010, the aggregate public deposits of the NBFC sector were Rs. 17,247 crore. Add to this the amount raised by companies as public deposits u/s. 58A of the Companies Act, 1956, deposits being accepted by unincorporated entities, and you would have an amount which would be mind boggling. However, since it is very easy to raise these deposits, a very large number of cases of defaults and frauds are also associated with public deposits. Various Central and State Legislations have been enacted to curb the default in repayment of deposits. Some of these Legislations appear to be entrenching each other’s territories and hence, have invited close scrutiny from the Supreme Court and various High Courts. The Supreme Court’s decision in the case of Sahara India Real Estate Corp. v SEBI, C.A. No. 9813 of 2011, Order Dated 31st August, 2012, is an example of Courts taking the matter of investor repayment very seriously. Although that case was not in relation to public deposits, it does show us the importance the Courts place on these matters. Let us look at some of the important and controversial issues connected with repayment of deposits which the Courts have had an occasion to consider.

Laws Governing Raising of Deposits by Companies

 Deposits generally mean any deposit of money with a company, subject to exclusions mentioned expressly. What does and does not constitute a deposit can be a subject matter of discussion by itself. However, it would suffice to say that the scope of the term is very large. Deposits can be raised by two types of companies:

(a) Non-banking Financial Companies; and

(b) Companies other than NBFCs

Anup P. Shah Chartered Accountant laws and Business The raising of deposits by NBFCs is governed by Chapter III B of the Reserve Bank of India Act, 1934 (“the RBI Act”). Pursuant to this Act, the RBI has notified the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998; Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 and the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977.

 In the case of Companies which are not NBFCs (also known as NBNFCs), the raising of public deposits is governed by s/s. 58A to 58AAA of the Companies Act,1956 read with the Companies (Acceptance of Deposits) Rules, 1975. These Laws lay down the meaning of the term deposit as well as various conditions subject to which public deposits can be raised by companies or NBFCs.

 45Q and 45QQA of the RBI Act provide that every deposit accepted by a NBFC shall be repaid in accordance with the terms and conditions of the deposit. In case the NBFC fails to so repay the deposit, then the Company Law Board is empowered, either suo moto or an application, to order repayment or reschedule the terms and conditions of repayment. The provisions of these sections override all other laws. In case the NBFC fails to comply with the CLB’s Order, then the RBI can launch prosecution in respect of the same. Any person in default is liable to be punished with imprisonment for a term of up to three years and a fine of at least Rs. 50 for every day of noncompliance.

In the case of Piyush Rastogi v Moulik Finance and Resorts Ltd., 88 SCL 104 (All), it was held that RBI had power, jurisdiction and authority to file a criminal complaint against default/contravention made in respect of deposits’ repayment by the company and its directors and, therefore, submission of petitioner that initiation of criminal proceedings was illegal and without any jurisdiction was wholly erroneous. In the case of RBI v Integrated Finance Co. Ltd., 145 Comp. Cases 87 (Mad), the Court held that the repayment of a deposit contemplated under the RBI Act was repayment in cash and not in kind. It further held that the jurisdiction of the CLB to order repayment could not be usurped by any other Court. The CLB has held that there are no fetters on the powers of CLB under the RBI Act and in a particular case, the CLB may order repayment of deposits in modification of the parameters fixed by the RBI – B. Bharathi v Rockland Leasing Ltd., 95 Comp. Cases 471 (CLB).

Repayment by Other Companies

If a company, other than an NBFC, accepts deposits in violation of the Companies (Acceptance of Deposits) Rules, 1975 made u/s. 58A of the Companies Act, 1956, then the same shall be repaid within 30 days. The CLB may, u/s. 58A(9) order the repayment or rescheduling of the repayment of the deposits by companies other than NBFCs. Failure to comply with the CLB’s order may result in an imprisonment of three years and a fine of at least Rs. 500 for every day of non-compliance. Further, in case of defaults in repayment of deposits of small depositors (deposit of Rs. 20,000 or less in a financial year), the company is required to intimate the CLB. The validity of section 58A has been upheld by the Supreme Court in the case of Delhi Cloth & General Mills Co Ltd v UOI, (1983) 4 SCC 166.

Deposits by Individuals, Firms, AOPs

The RBI Act prohibits any individual, firm, AOP, etc., from accepting deposits if that person’s business is that of financing/non-banking financial activities/ receiving deposits/any lending, etc. However, loans raised from certain relatives, partner’s capital, etc., are allowed. The penalty for violation of this provision is punishable with imprisonment for a term of upto two years and/or with a fine higher than Rs. 2,000 or upto twice the deposit received by that person.

The validity of these provisions has been upheld in Kanta Mehta v UOI, 62 Comp. Cases 769 (Delhi) which was affirmed by the Supreme Court in T. Velayudhan Achari v UOI, (1993) 2 SCC 582. The Supreme Court has also held that the provisions of this section are applicable to money-lenders, being individuals/firms, registered under State Moneylending Acts, e.g., the Bombay Money-lending Act, 1946 and the State Laws cannot override the RBI Act – Kerala Small Financiers’ Association v UOI, 116 Comp. Cases 641 (SC). Very recently, the RBI has clamped down on certain sole proprietary firms of the promoters of some large NBFCs, which were raising deposits in violation of this provision.

Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act)

 In addition to the above two Central Acts, various States, such as, Maharashtra, Gujarat, Bihar, Tamil Nadu, Andhra Pradesh, etc., have enacted Depositor Protection Acts. One such Act is the MPID Act of 1999 applicable in the State of Maharashtra. MPID is an Act to protect the interest of depositors of Financial Establishments and applies to “deposits” raised by a Financial Establishment. Section 014 of this Act provides that this Act overrides all other laws. Section 2(c) of the MPID Act defines the expression “deposit” to include 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. Thus, the definition of the term is much wider than the definition found under the Companies Act or the RBI Act. The definition expressly excludes the following:

(i) Amounts raised by way of share capital, debenture, bond, other instruments in accordance with SEBI Regulations. Thus, the public issue of securities is excluded.

(ii) Partners’ capital in a firm.

(iii) Amounts received from a bank.

(v)    Amounts received in the ordinary course of business by way of, –
(a)    security deposit,
(b)    dealership deposit,
(c)    earnest money,
(d)    advance against order for goods or services;

(vi)    Any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in the State. Thus, money received from a money-lender registered under the Bombay Money-lending Act, 1946 is not a deposit.

(vii)    Any amount received by way of subscriptions in respect of a Chit.

A    “Financial Establishment” is defined to mean any person accepting deposit under any scheme or arrangement or in any other manner. It does not include a Government company or a bank. The term is very wide and covers within its purview, individuals, firms, NBFCs, companies, etc., which receive deposits.

Section 3 of the MPID Act provides that if any Financial Establishment fraudulently defaults in repayment of a deposit on maturity, then every person, including the promoter, partner, director, any other person, employee, etc., responsible for the management or conducting the business/affairs of the Financial Establishment shall be punished. The penalty is a term of upto six years and fine of upto Rs. 1 lakh. In addition, the Financial Establishment shall be liable for a fine of up to Rs. 1 lakh. The provisions of the MPID Act do not overrule the Criminal Procedure Code and all provisions of arrest, bail, etc., provided in the Code would have to be followed – Uday Mohanlal Acharya v State, (2001) 5 SCC 453.

Section 4 provides an additional recourse to the aggrieved depositor. If the State Government is satisfied that there is a default, it may order attachment of the Financial Establishment’s properties. Only property belonging to the defaulter can be attached. Property taken onleave and licence by the defaulter is not his property and cannot be attached – Chimanlal Modi v State, 2004 (2) Bom. CR. (Cri) 866.

Validity of State Depositor Protection Acts

The validity of the MPID and other similar State Depositor Protection Acts have been the subject matter of great debate. The moot point has been that, when there are Central Statutes in the form of the Companies Act and the RBI Act, how can a State Statute legislate on the very same issue? A Full Bench of the Bombay High Court in the case of Vijay C Puljal v State, 128 Comp. Cases 196 (Bom) (FB), had an occasion to consider this issue in detail. Striking down the validity of the MPID Act as being ultra vires, the Bombay High Court held as follows:

(i)    The constitutional validity of s. 58A of the Companies Act, 1956 has been upheld by the Supreme Court. It has also held that the Parliament has legislative competence to enact Sections 58A, 58AA and 58AAA of the Companies Act, 1956.

(ii)    The validity of the provisions of the RBI Act and the legislative competence of Parliament to enact Chapter III-C of this Act were upheld by the Supreme Court.

(iv)    The legislation enacted by the MPID Act directly conflicted with the provisions contained in the Central Legislation. The MPID Act has created an offence in respect of the same subject matter by providing different punishments;

(v)    The law enacted by the MPID Act is, in pith and substance, referable to legislative heads contained in the Central Acts. Hence, the State Legislature has enacted a law which it was not competent to enact.

However, the Supreme Court in the case of K.K. Baskaran v State, (2011) 3 SCC 793 has overruled the aforesaid Bombay High Court decision. Although this was a case in relation to the Tamil Nadu Depositors Act, the Supreme Court expressly overruled the decision in the case of Vijay Puljal. The Madras High Court had upheld the validity of the TN Act, and the case before the Supreme Court was in challenge to this Order. The Apex Court took a socialistic view of the situation and upheld all Depositor Protection Acts. Some excerpts from its judgment are as follows:

“18. Learned 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.

19.    We 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.

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22.    We 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.

24.    It is well-settled that incidental trenching in exercise of ancillary powers into a forbidden legislative territory is permissible.

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38.    The 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.
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39.    We 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.

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44.    We 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 mea-sure which was long overdue to deal with these scamsters who have been thriving like locusts in the country.”

Directors’ Duty

Directors of a company/entity accepting public deposits should be extra cautious, because the consequences are quite stringent in nature. In case of any doubt over whether the company is in violation of any Central/State Deposit Law, they should immediately obtain expert advice. Courts, generally, have a sympathetic attitude towards depositors and hence, deposit acceptors should be wary of any non-compliance on their part. The old adage of “better safe than sorry” would work best and hence, they should consider setting a system of checks and balances in place beforehand.