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IN THE HIGH COURT OF BOMBAY
VIJAY C. PULJAL
Versus
STATE OF MAHARASHTRA
Decided Date: 5/09/05
Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999 - Constitution of India, Article 226 - Validity of Act - Challenged - A declaration sought that Act is ultra vires - On ground that State Legislature does not possess legislative competence to enact law - Law fell within purview of legislative heads enunciated in Entries 43, 44 of Union list of Schedule VIIIth - Essential character of legislation is not with reference to public order - State Legislature not competent to enact a law (Act) - Act ultra vires - Petition allowed. - The Supreme Court held that Parliament has legislative competence to enact Section 58-A of the Companies Act, 1956 and that the provision was relatable to the legislative heads contained in Entries 43 and 44 of List I of the Seventh Schedule. The same principle of law must apply to the subsequent amendments to the Companies Act, 1956 by which the provisions of Section 58-AA and Section 58-AAA were introduced.
The legislative competence of Parliament to enact Chapter III-C of the Reserve Bank of India Act, 1934 was upheld by the Delhi High Court with reference to the provisions of Entry 45 of List 1 and at any rate with reference to Entry 97 of List 1. The reasoning of the Delhi High Court has been affirmed by the Supreme Court. Hence, it would not be possible for the Court to hold that legislation regulating deposits in relation to unincorporated entities and individuals, is referable to a legislative head in the State List.
The legislation enacted by the State Legislature in the present case directly conflicts with the provisions contained in the Central Legislation. The ingredients of the offence of fraudulent default in the repayment of the deposits as created in Section 3 of the State Act squarely fall within the provisions of Section 58-A and Section 58-AA. The State Legislature has created an offence in respect of the same subject-matter and providing for different punishments. The law enacted by the State Legislature is in pith and substance referable to legislative heads contained in List 1 of the Seventh Schedule. The essential character of the legislation is not with reference to public order.
The State Legislature has in the present case enacted a law which it was not competent to enact.
Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999 - Object of Maharashtra Protection Act, 1999. - Act, 1999 covering offences regarding fraudulent default in payment of deposits, not falls within ambit of expression "public order". - The Act of 1999 enacted by the State Legislature is essentially a law which defines an offence with reference to a fraudulent default in the payment of deposits. The said law cannot be read and regarded as a law with reference to public order. (1990) 4 SCC 366; AIR 1959 SC 544 and (1977) 1 SCC 677.
Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act, 1999 - Section 1 - Constitution of India, Article 246 - Conditional validity of Act, 1999. - Maharashtra Protection of Interests of Depositors Act, 1999 enacted by State Legislature is ultra vires. - The Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999 enacted by the State Legislature is in pith and substance referable to legislative heads contained in List I of the Seventh Schedule of the Constitution. The State Legislature has enacted a law which it was not competent to enact. The said Act is declared to be ultra vires. (1983) 4 SCC 166; 62 Com Cases 771 and (1993) 2 SCC 582 - Relied.
D. Y. CHANDRACHUD, J.
( 1 ) THE constitutional validity of the maharashtra Protection of Interests of Depositors (In Financial Establishments) act, 1999, forms the basis of challenge in this batch of petitions under Article 226 of the Constitution. These petitions have been placed before the Full Bench by the Learned Chief Justice, in pursuance of a reference made on 3rd september, 2004 by a Division Bench. Though the Act has been challenged on several grounds, arguments before the Court have been confined to the legislative competence of the State Legislature to enact the law. Counsel appearing on behalf of the petitioners and the State had fairly stated before the Court that it would become necessary for the Court to deal with the other challenges only in the event that this Court does not accept the principal challenge on the ground of a want of legislative competence. We have come to the conclusion that the provisions of the Act are ultra vires for want of legislative competence in the state Legislature. II facts :
( 2 ) THE petitioner in Writ Petition 5186 of 2001, was a whole time Director of Pennar Paterson Securities Limited, a company incorporated under the companies Act, 1956 with a registered office at Hyderabad. The Company was a non-banking finance company and is stated to have advanced money to several companies. The Company is stated to have sustained huge losses and on 24th november, 1999, the High Court of Andhra Pradesh noted in the course of its order in a Company Petition that the Company had outstanding debts of Rs. 13. 07 crores on 30th September, 1999. A Provisional Liquidator was appointed by the High Court. The Liquidator was directed to recover the amounts due to the company and to not distribute any portion of the recoveries to the creditors. Among the Consequential directions was a direction to the Official Liquidator to associate three persons from amongst the secured creditors as part of a committee that would submit a report to the Court on the viability of the company. The Official Liquidator is stated to have submitted a report to the andhra Pradesh High Court recording that an amount of Rs. 17 crores could be recovered by the Company that certain decrees have been obtained for the recovery of the outstanding dues which would have to be executed. The company is stated to have received notices from depositors at Mumbai, Pune, aurangabad and Nagpur seeking the repayment of their deposits on maturity and it has been stated that notices have been received threatening prosecution against the Company and its Directors under the provisions of the State Act. A declaration has been sought in these proceedings that the Act is ultra vires on the ground that the State Legislature did not possess legislative competence. We have adverted to the facts of the main petition before the Court with a view to enunciate in brief, a flavour of the underlying facts in this batch of cases. The common thread, as it were, is a default in the repayment of depositors in diverse parts of the State. III the Maharashtra Act :
( 3 ) THE Act was reserved for and received the assent of the President of india on 21st January, 2000. The Act was preceded by Ordinances promulgated on 29th April, 1999 and on 2nd December, 1999 and is deemed to have come into force on 29th April, 1999 by virtue of the provisions of section 1 (2 ). The statement of Objects and Reasons sets out the underlying basis of the enactment in the following terms :
"there is mushroom growth of Financial Establishments in the State of maharashtra in the recent past. The sole object of these Establishments is of grabbing money received as deposits from public, mostly middle class and poor on the promises of unprecedented highly attractive rates of interest or rewards and without any obligation to refund the deposit to the investors on maturity or without any provision for ensuring rendering of the services in kind in return, as assured. Many of these Financia
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