Case: M/S. New Horizon Sugar Mills Vs. Gov.Of Pondicherry Tr.Addl.Sec

4. The lis between the parties to these appeals can be traced back to the credit facilities availed of by the Appellant, M/s New Horizon Sugar Mills Pvt. Ltd., from the Indian Bank, Pondicherry, to the tune of Rs.26,50,00,000/-. The Directors of the Mill, viz., Shri V. Kannan and Shri V. Baskaran, stood as guarantors for repayment of the loan and offered their personal properties as collateral securities. As the Appellant Mill defaulted in payment of the loan amount, the Bank, after declaring the loan account of the Mill to be a, initiated proceedings for recovery by issuing notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,. The said notice was challenged by the Appellant by filing Writ Appeal No.33700 of 2004, before the Madras High Court. By order dated 6th December, 2004, the said Writ Appeal was disposed of with a direction to the Appellant Mill to repay the entire loan amount in three instalments.5. In the same order, the Court also indicated that in case the Appellant defaulted in payment of the instalments, the Bank could proceed against the Appellant Mill, in accordance with law. Since the Appellant Mill committed default even in payment of the first instalment, the Bank proceeded further and under the provisions of Sub-Sections (2) and (4) of Section 13 of the SARFAESI Act took possession of the property offered as security and also initiated steps for sale of the same by auction. In the auction proceedings, M/s E.I.D. Parry (India) Ltd.) was the successful bidder. The said auction was challenged by several other banks and financial agencies to safeguard and protect their respective claims against the Mill. On 12th July, 2005, all the Writ Petitions, including the one filed by the workers/employees of the Appellant Mill, were dismissed. In respect of the Writ Petition filed by Pondicherry Nidhi Ltd. (PNL) Depositors Welfare Association, the High Court directed the Association to work out their remittance under the provisions of the Reserve Bank of India Act) as also Act 1 of 2005.6. On receiving the Sale Confirmation Letter from the Bank, Parry Ltd. remitted their entire balance amount and fulfilled all other formalities for getting the Sale Certificate registered in its favour. At the same time, on the basis of a complaint received from one of the depositors, alleging that Shri V. Kannan and Shri V. Baskaran, said to be the major shareholders of M/s PNL Nidhi Ltd. as well as being the Directors of the Appellant Mill, had misappropriated a sum of Rs.12.5 crores belonging to M/s PNL Nidhi Ltd. and diverted the same for their own trade, the Chief Judicial Magistrate, Pondicherry, ordered attachment of various properties standing in their names and in the name of one Sivapriyal. This was followed by the Government Order, being G.O.Ms.No.12 dated 18.2.2006, ordering attachment of the properties acquired by M/s PNL Nidhi Ltd. Inasmuch as, by virtue of the said orders of attachment, M/s Parry Ltd. could not get the Sale Certificate registered in respect of the property auctioned, it filed Writ Petition No.6453 of 2006 for quashing the said G.O.Ms.No.12 dated 18.2.2006 and for a direction to the District Registrar, Registration Department, Pondicherry, to register the Sale Certificate in their favour with regard to the properties in which they had succeeded in the auction sale. The Indian Bank also filed Writ Petition No.5389 of 2006 for the same relief so that they could comply with the provisions of the SARFAESI Act for registering the Sale Certificate in favour of M/s Parry Ltd. The Appellant Mill filed Writ Petition No.1897 of 2006 for an appropriate direction to the Indian Bank to return to them such sums as would be due from out of the total sale consideration after deducting the dues of the Bank incurred as on 1st January, 2005, the date on which possession of the property in question was taken over and for return of the remaining documents pertaining to the movable and immovable properties belonging to the Appellant after satisfying thecharge. The Appellant Mill filed another Writ Petition No.8797 of 2006 challenging the validity of G.O.Ms.No.12 dated 18.2.2006. Several other Writ Petitions were filed by Shri V. Kannan and Shri V. Baskaran and M/s Indian Renewable Energy Development Agency Ltd.New Delhi, and M/s Arunachalam Sugar Mills Ltd., Pondicherry, also filed several Writ Petitions challenging the validity of the aforesaid Government Order.7. A learned Single Judge of the Madras High Court took up the Criminal Revision Petition No.1352 of 2005 filed by the Bank questioning the Order dated 18th February, 2005, passed by the Chief Judicial Magistrate in Crime No.31 of 2004, along with various Writ Petitions filed by different parties, and by his order dated 23rd August, 2006, the learned Judge lifted the order of attachment passed in respect of the properties in question and also directed the District Registrar, Registration Department, Pondicherry, to register the Sale Certificate issued in favour of M/s Parry Ltd. The learned Single Judge further directed the Appellant (Writ Petitioner in Writ Petition No.1897 of 2006) to approach the Debts Recovery Tribunal under Section 17 of the SARFAESI Act regarding their claim of refund of the excess amount alleged to have been retained by the Bank. The learned Judge also made it clear that as far as the properties included in the impugned orders were concerned, it would be open to third parties to approach the Designated Court under Act 1 of 2005 for appropriate relief.8. Questioning the said common order, the Appellant Mill and its Directors filed Writ Appeal Nos.1142 to 1144 of 2006 and the Pondicherry Non-Banking Investors Protection Association preferred Writ Appeal Nos.1342 to 1345 of 2006. However, while upholding the validity of Act 1 of 2005, the learned Judge limited its operation to Unincorporated Institutions. Aggrieved by the said decision, the Government of Pondicherry preferred Writ Appeal No.293 of 2007.9. Yet another facet of the issues involved in these Appeals is the Writ Petitions filed by the Banks and Financial Institutions to safeguard their interests in regard to attachment and sale of the properties of the Appellant Mill. The said Writ Petitions were considered by another learned Judge of the Madras High Court, who by his order dated 12th July, 2005, in PNLWelfare Association Versus Union of India, with reference to the SARFAESI Act, the Sick Industrial Companies (Special Provision) Act, 1958, Act 1 of 2005 and the provisions of the Industrial Disputes Act, 1947, and in particular, Section 25FF thereof, disposed of the Writ Petitions upon holding that the members of theassociation/workers, either individually or through their respective Unions, were entitled to the benefit available under Section 25FF of the 1947 Act from the Appellant Mill and Parry Ltd., in view of Section 13(6) of the SARFAESI Act. In the same order, the learned Judge directed the members of theAssociation and others to avail of the remedies provided under the SARFAESI Act, as well as Act 1 of 2005, for necessary reliefs. The said decision of the learned Single Judge was questioned by Parry Ltd. and the Commissioner of Central Excise, Pondicherry, who filed W.A. Nos.1787 of 2005 and 1999 of 2005 respectively, claiming that theclaims were superior to those of others against the Appellant Mill and its properties.10. A third set of Writ Petitions was filed by Puduvai Pradesa Sarkarai Aalai Thozhilalar Sangam; Indian Bank and the Ariyur Sugar Mills Staff Welfare Union being W.P. Nos.24834, 30532 and 36900 all of 2005, praying for appropriate directions. By a common order dated 7th December, 2005, another learned Judge of the Madras High Court appointed Justice K.P. Sivasubramaniam, a retired Judge of the Madras High Court, as Commissioner to go into the claims of the workmen. By the same order the learned Judge directed the Indian Bank to deposit Rs.6 crores in a no-lien account in the Indian Bank, Pondicherry Main Branch, on 8th December, 2005. Questioning the said order, the Appellant Mill filed Writ Appeal No.1209 of 2006. All the said matters were taken up for consideration together by the Division Bench. In its impugned judgment, the Division Bench agreed with the conclusion arrived at by the learned Single Judge with leave to the parties to approach the Tribunal to protect their interests. Writ Appeal No.1142 of 2006 was, accordingly, dismissed, with liberty to the Appellant Mill to approach the Debts Recovery Tribunal for appropriate relief.11. Apart from the submissions relating to Section 25FF of the Industrial Disputes Act, 1947, what we are really concerned with in these appeals is with regard to the validity of the Pondicherry Protection of Interests of Depositors in Financial Establishments Act, 2004 (Act 1 of 2005) and G.O.Ms.No.12 dated 18.2.2006 issued by the Department of Revenue and Disaster Management. As indicated hereinbefore, the object of the Act was to protect the interests of depositors in financial establishments in the Union Territory of Pondicherry. The Division Bench of the High Court observed that, inasmuch as, the Tamil Nadu Protection of Interests of Depositors (in Financial Establishments) Act, 1997, were in pari materia with the provisions of the Pondicherry Act of 2005 and the provisions of the Tamil Nadu Act had been upheld, nothing further was required to be gone into in that regard. However, after the decision of a Full Bench of the Bombay High Court in the case of Vijay C. Puljal vs. State of Maharashtra [(2005) 4 CTC 705] , by which the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999, was struck down, a batch of Writ Petitions came to be filed before the Madras High Court challenging the provisions of the Tamil Nadu Act. Since the provisions of the Maharashtra Act had been struck down by a Full Bench of the Bombay High Court, the Writ Petitions were also contested before a Full Bench, which considered the contentions relating to the jurisdiction of the State Government, with reference to various Entries in the Seventh Schedule to the Constitution, provisions of the Companies Act, Reserve Bank of India Act and the Maharashtra Act and after examining the challenge thrown to the vires of the Act, came to the conclusion that the Tamil Nadu Act did not suffer from any legislative incompetency, nor was it arbitrary, unreasonable, or violative of the principles of natural justice. The Writ Petitions were, accordingly, dismissed. The Division Bench after considering the pronouncement of the Full Bench in regard to the Tamil Nadu Act and finding that the entire provisions of the Pondicherry Act 1 of 2005 were in pari materia with the provisions of the Tamil Nadu Act, held that the challenge to the legislative competency and jurisdiction of the Government of Pondicherry in enacting the impugned Act, was liable to be rejected.12. A question of considerable importance also came up for consideration in the appeal filed by the Government of Pondicherry with regard to the observations of the learned Single Judge in Writ Petition No.1897 of 2006, wherein the learned Single Judge while upholding the validity of the enactment, went on to observe that the impugned enactment was made only in relation to unincorporated trade establishments and the State Legislature of Pondicherry had legislative competence to legislate in respect of unincorporated financial establishments only. In this regard, a submission was made on behalf of the Government of Pondicherry to the effect that Entry 32 of List II of the Seventh Schedule to the Constitution was only a residue of Entry 42 in the Central List and that Entry 32 also covered incorporated companies. It was submitted that the learned Single Judge had erroneously held that Pondicherry Act 1 of 2005 only governed unincorporated trade establishments.13. In this regard, it was submitted before the Madras High Court by the learned Government Pleader that on a complaint received by the Pondicherry Police from one Boothanathan, alleging that the amount deposited by him in PNL Nidhi Ltd. had not been returned, the Pondicherry Police registered a case in Crime No.31 of 2004 on the file of the C.I.D., Pondicherry, which took up the investigation. Subsequently, about 3000 complaints were received from mostly aged people and retired Government servants who had invested their savings in the various financial establishments. On inquiry it was found that PNL Nidhi Ltd. had changed its name five times. It was initially a company known asincorporated under the Companies Act, 1956. The name of the Company was later changed to Prasanan Narayanan Laxmi Nidhi Ltd. The name of the Company was again changed to PNL Nidhi Ltd. The Company floated various schemes, such as Fixed Akshaya Deposit and Locker facility and accepted deposits under the said scheme. It was also discovered that PNL Nidhi Ltd. was an unregistered and unrecognized financial establishment and that the promoters of PNL Nidhi Ltd. were Kannan and Baskaran, who were brothers and were also the Directors of the Appellant Mill. It also transpired that the funds of the PNL Nidhi Ltd. were utilized for the purchase of properties in the name of the Appellant, New Horizon Mills, Pondicherry, and Arunachala Sugar Mills, Thiruvannamalai, and also for purchase of land at Kumbakonam, and land and buildings in Pondicherry and Chennai. The investigation conducted by the C.I.D., Pondicherry, revealed that the deposits collected from the depositors of PNL Nidhi Ltd. had been channelised to New Horizon Sugar Mills, wherein also Kannan and Baskaran were the Directors. It was on account of the bogus cheques which had been issued and dishonoured for want of funds, that the Chief Judicial Magistrate, Pondicherry, ordered attachment of the properties of the Appellant Mill and its Directors and in order to save the innocent investors from such companies and firms, the Government of Pondicherry introduced the Pondicherry Protection of Interests of Depositors (in Financial Establishments) Bill, 1997, which ultimately became an Act in 2004.

Court's reasoning:
45. At this stage, it may also be worthwhile to consider Mr.submissions that the power to enact the Pondicherry Act could be traced to Entries 1, 8, 13 and 21 of the Concurrent List. Entry 1 of List III deals with criminal law, including all matters included in the Indian Penal Code at the commencement of this Constitution, but excluding offences against laws with respect to any of the matters specified in List I or List II and excluding the use of naval, military or air forces or any other armed forces of the Union in aid of the civil power. Entry 8 deals with actionable wrongs. Entry 13 deals with civil procedure while Entry 21 deals with Commercial and Industrial monopolies, combines and trusts. Such submission has been advanced by Mr. Venkataramani in view of the provisions of Section 58A, 58AA and 58AAA of the Companies Act, 1956, which all deal with deposits invited and accepted by Companies. The said submission is, however, subject to the condition that the provisions of the Companies Act are also attracted to the provisions of the Pondicherry Act. Although, it has been argued by Mr. Ganguli that the provisions of the Companies Act would not be attracted, we cannot overlook the amendment to the definition ofed in the Tamil Nadu Act and as defined in the Pondicherry Act. The definition of the expressionin Section 2(d) of the Pondicherry Act, which has been extracted in paragraph 14 hereinbefore, includes any person or group of individuals or a firm carrying on business of accepting deposits under any scheme or arrangement or in any other manner, but does not include a Corporation or a cooperative society owned or controlled by either the Central Government or the State Government or a banking company as defined under Section 5 of the Banking Regulation Act, 1949. In our view, the expressionis wide enough to cover both a natural person as also a juristic person, which would also include a Company incorporated under the Companies Act, 1956. In that view of the matter, the definition in Section 2(d) of the Pondicherry Act would also include a Company such as the Appellant Mill, which accepts deposits from investors, not as shareholders of such Company, but merely as investors for the purpose of making profit. In this regard, reference may also be made to Section 11 of the Indian Penal Code which defines ato include a Company or Association or body of persons, whether incorporated or not. Accordingly, we are inclined to accept Mr.submissions that the expressionin the Pondicherry Act includes both incorporated as well as unincorporated companies.46. The decision in K.K.case (supra) so far as it relates to protection of interests of depositors, cannot be ignored. In our view the decision rendered by the Madras High Court in K.K.case (supra) would be equally applicable to the facts of this case. We have to bear in mind that the validity of the Tamil Nadu Act and the Maharashtra Act have been upheld by the Madras High Court and this Court. The objects of the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act being the same and/or similar in nature, and since the validity of the Tamil Nadu Act and the Maharashtra Act have been upheld, the decision of the Madras High Court in upholding the validity of the Pondicherry Act must also be affirmed. We have to keep in mind the beneficial nature of the three legislations which is to protect the interests of small depositors, who invest theirearnings and savings in schemes for making profit floated by unscrupulous individuals and companies, both incorporated and unincorporated. More often than not, the investors end up losing their entire deposits. We cannot help but observe that in the instant case although an attempt has been made on behalf of the Appellant to state that it was not the Appellant Company which had accepted the deposits, but M/s PNL Nidhi Ltd., which had changed its name five times, such an argument is one of desperation and cannot prima facie be accepted. This appears to be one of such cases where funds have been collected from the gullible public to invest in projects other than those indicated by the front company. It is in fact the specific case of the Respondents that the funds collected by way of deposits were diverted to create the assets of the Appellant Mill.47. In such circumstances, we are not inclined to accept the submissions made by Mr. Ganguli, since in our view there is little difference between the provisions of the Tamil Nadu Act and the Pondicherry Act, which is to protect the interests of depositors who stand to lose their investments on account of the diversion of the funds collected by M/s PNL Nidhi Ltd. for the benefit of the Appellant Mill, which is privately owned by Shri V. Kannan and Shri V. Baskaran, who are also Directors of M/s PNL Nidhi Ltd.