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This case is in regard with the Chennai-based Helios and Matheson, an unfancied software company, has been defaulting on repayment to its investors. According to a status report submitted in the Court, H&M has collected Rs 55.25 crore from 6,540 depositors from across the country. Out of this, 1046 depositors filed complaints against the company before the Economic Offences Wing (EOW) for default on deposits worth Rs46.04 crore and interest of Rs72.81 lakh. This writ appeal stems from a decision by the learned single Judge rejecting the appellant’s writ petition, which sought a declaration that a First Information Report filed against them in Crime No.5/2015 on the file of the City Police’s Economic Offenses Wing was without jurisdiction.
- The appellant company was incorporated as a Public Limited Company in the name and style of “Express Financial Limited,” with its headquarters in T.Nagar, Chennai. On 8.3.1991, it was formed under the Companies Act of 1956. With effect from 29.4.1999, the company’s name was changed to “Helios and Matheson Information Technology Limited,” as it is now known. They accepted deposits from the general public as well as stockholders for over ten years in accordance with Section 58-A of the Companies Act, 1956, and they were extremely fast in repaying them.
- A new set of rules dealing with “Acceptance of Deposits by Companies” from Section 73 to 76 in Chapter V became applicable once the Companies Act of 1956 was repealed by the Companies Act of 2013. If the amount of the deposit or any interest due on it remained overdue on the commencement of the Act, every firm that took a deposit before the start of the Act was supposed to file a statement with the Registrar of Companies, in accordance with Section 74(1) of the Act. Such businesses were also barred from accepting new deposits under the 2013 Companies Act unless two conditions were satisfied, namely (i) shareholder permission at an Annual General Meeting. (ii) a CRISIL credit grade of A++ is attained
- The appellant was unable to meet both of the requirements set out in the Companies Act of 2013 for the admission of new deposits. As of the date of the commencement of the 2013 Companies Act, the appellant was also in failure in repaying deposits and interest to a large number of depositors. Under Section 74(2) of the Companies Act, 2013, the appellant filed an application with the Company Law Board. On 27.3.2015, the application was really filed. The reliefs sought in the application were:
(a) to extend the time for repayment of the deposits matured on or before 31.3.2014 by a further period of 6 months; and
(b) to extend the time for repayment of the deposits matured after 31.3.2014 by a further period of one year.
- The appellant’s six-month period asserted in their appeal before the Company Law Board had already expired when the application under section 74 (2) was filed. The request requested in second relief was due to expire in four days when the petition under Section 74(2) of the Companies Act, 2013 was filed. On the other hand, on 1.4.2015, one Dr.K.Ranjit Chitturi filed a complaint with the Deputy Superintendent of Police, Economic Offences Wing-II, Anna Nagar, alleging that the appellant received deposits from investors. They filed a First Information Report for an alleged breach of Section 5 of the TNPID Act 1997 and Section 420 of the Indian Penal Code in Crime No.05/2015.In W.P.No.10015 of 2015, the appellant filed a writ petition challenging the constitutional validity of the Tamil Nadu Protection of Depositors’ Interests (In Financial Establishments) Act 1997 in light of the Companies Act, 2013.
- Recognizing the futility of such a challenge, the appellant withdrew the writ petition during the hearing, leaving himself free to submit all of his arguments in a quash petition to be filed under Section 482 of the Code of Criminal Procedure, seeking the quashing of the FIR in Crime No.05 of 2015.
- Appellant also withdrew the quash Petition, leaving all the contentions open to be raised at the right forum and at the right stage. In W.P.No.14664 of 2015, the appellant filed a writ petition under Article 226 of the Constitution, requesting that a writ of declaration be issued declaring that the FIR in Crime No.5 of 2015 was without jurisdiction and ultra vires.
- This case is essentially the appellant’s third attempt to prevent the respondent police from conducting an investigation. The appellant’s first attempt came in the form of a writ petition contesting the Tamil Nadu Act’s constitutional validity. The appellant’s second attempt to quash the FIR came in the form of a petition under Section 482 of the Code of Criminal Procedure. As a result, the current attempt to block an investigation, which is the third in a row, necessitated a thorough examination, which the learned Judge conducted before concluding that the writ petition was without merits.
- In September of 2014, the appellant and its directors were subjected to a police scanner. On the demand of a depositor named D.Ramalingam, the police filed the first criminal complaint. The sum due has been paid by the appellant. The appellant then filed an application with the Regional Bench of the Company Law Board on 27.3.2015, requesting two reliefs under Section 74(2) of the Companies Act, 2013. A second complaint was filed before the Company Law Board before it could proceed with the hearing of the application under Section 74(2) of the Companies Act, 2013. The Economic Offences Wing registered the complaint
- It appeared after investigation that 745 depositors have given complaints alleging that they have been cheated. The investigation also revealed that the appellant has debts due to 5 banks to the total tune of Rs.189,76,33,434/-.
- Meanwhile, three depositors filed petitions in the Company Court under Sections 433(e) and 434(1)(a) of the Companies Act, 1956, to wind up the appellant (C.P.Nos.143 to 145 of 2015). The creditors also filed interlocutory motions for the appointment of a Provisional Liquidator together with the petitions for winding up. On the petitions for the appointment of a Provisional Liquidator, the Company Court issued an order on the 30th of March 2015, requiring the appellant to receive notice by the 7th of April 2015.
(i) Is it possible to prosecute a corporation that is not in the business of receiving deposits but received deposits in line with the Companies Act,1956, under the Tamil Nadu Protection of Depositors’ Interests (In Financial Establishments) Act,1997, TNPID Act?
(ii) Is it possible for the police to investigate and consider complaints under the Tamil Nadu Protection of Depositors’ Interests (In Financial Establishments) Act, 1997, without the approval of the competent authority?
It was first contended by the counsel for appellants that the State Legislature did not intend to render all types of firms subject for prosecution under the TNPID Act, 1997, if they were unable to return the deposits for whatever reason. Because a “financial establishment” is defined in Section 2(3) of the TNPID Act to include only those companies that carry on the business of receiving deposits under any scheme or arrangement, it is argued that companies like the petitioner herein, which provide software solutions, cannot be prosecuted under the Act. Mr.P.S.Raman, arguing that such an interpretation would put firms like Tata Consultancy Services Limited, Cognizant Technology Limited, and Infosys at risk of being prosecuted under the TNPID Act, argued that the Act’s purpose should not be overlooked. The appellant claims that they are in the business of providing software solutions to customers in the banking and financial sectors. The nature of the business conducted by the appellant’s customers was described in the annual report posted on the website. According to the learned senior counsel, the appellant’s true business must be understood in the context of what is horizontal and vertical in web portals.
Further the counsel for the appellant in regard to the second issue contended that the TNPID Act, 1997 scheme prohibits the police from registering, inquiring into, and investigating any complaint pertaining to the conduct of a crime punishable under Section 5 of the Act. Only the competent authority established under the Act has this jurisdiction. A learned Judge of this Court, in Crl.O.P. No.21711 of 2007, found against an accused in a quash petition in Crl.O.P. No.21711 of 2007, by a ruling dated 4.12.2008. However, in P.S.Chellamuthu v. State, the Supreme Court not only granted leave in SLP (Criminal) No.53 of 2009, but also issued a stay of execution and implementation of the aforementioned decision on. Therefore, Several financial institutions addressed the Supreme Court, requesting a stay of inquiry, based on the stay granted by the Supreme Court in P.S.Chellamuthu.
Decision By court
- With regard to the first argument given by the appellants that the provisions of the TNPID Act of 1997 cannot be used against all types of businesses, including the appellant in this case, which is solely in the business of providing software solutions and not in the industry of accepting deposits, the court took the reference of the decision of the Full Bench of the Bombay High Court where Maharashtra Act was termed unconstitutional, a fresh challenge was made to the constitutional validity of the Tamil Nadu Act, by some of the financial establishments and was referred to a Full Bench of this Court. The Full Bench dismissed all the writ petitions by a judgment of S.Bagavathy v. State . The bench held that:
The existing laws, namely Section 58A of the Companies Act, 1956, regulates the acceptance of deposits, and Section 45S of the Reserve Bank of India Act, 1934, prohibits the acceptance of deposits and prescribes appropriate punishment and penalties for violating the same, but the laws do not provide for the attachment of properties acquired either in the name of the Financial Establishment or in the name of the Financial Establishment. It also does not offer for the sale of the linked properties and the equitable distribution of the sale revenues to the depositors. The contested Act, on the other hand, provides for the attachment of properties of financial organisations and people specified in Section 3, as well as malafide transferees, sale, and fair distribution among depositors, in the public interest. As a result, the challenged Act cannot be said to aim to substitute or augment parliamentary law or to repair defects in parliamentary legislation, such as the Companies Act, 1956 or the Reserve Bank of India Act, 1934. As a result, the argument that the Tamil Nadu Act cannot fix the gap or shortcoming in legislative law is unsustainable.
After holding that the field of operation of the provisions of the Companies Act, 1956, and the Companies (Acceptance of Deposits) Rules was quite different from the field of operation of the Tamil Nadu Protection of Interest of Depositors (in Financial Establishments) Act, 1997 and also after holding that the object behind Section 58-A of the Companies Act, 1956 was completely different from the object of the Tamil Nadu Act, the Full Bench gives decision that at the most, the Tamil Nadu Act can be said to have trenched into the central Law to a small extent incidentally and that the same has to be understood in the light of the pith and substance of the legislation.
The Full Bench dealt with the question of legislative competency with specific reference to Section 58-A of the Companies Act, 1956 w.r.t. Delhi Cloth and General Mills Co. Ltd. v. Union of India CASE and held as follows:-
When a challenge is made to Section 58A of the Companies Act and Rule 3(A) of the Companies (Acceptance of Deposits) Rules in Delhi Cloth and General Mills Co. Ltd. v. Union of India, referred, the Apex Court held that the power to regulate the acceptance of the deposits by the Companies is well within the field of legislation of the Union of India. But, under Entry 32, the State is also competent to make appropriate laws incorporating and regulating the corporations other than those specified in List I and to make necessary laws for the unincorporated trading,
It is of interest to note that the writ petition filed by the appellant herein for quashing the First Information Report is on identical grounds on which the very validity of the TNPID Act, 1997, was questioned. the First Information Report is challenged almost on the same ground, namely that companies which are not in the business of receiving deposits and which are governed by the provisions of Section 74 of the Companies Act, 2013, cannot be prosecuted under the TNPID Act, 1997
The Supreme Court upheld the judgement of this Court’s Full Bench. However, in K.K.Baskaran v. State, the Supreme Court noted that the TNPID Act was amended by Tamil Nadu Amendment Act 30 of 2003, which expanded the term of “financial establishment” to include firms registered under the Companies Act, 1956, as well as non-banking financial companies. The Supreme Court dismissed the challenge brought under Section 58-A of the Companies Act, 1956, in K.K.Baskaran.
During the investigation or, in any scenario, during the trial, the appellant can always establish that they never carried on the business of receiving deposits under any Scheme or Arrangement or in any other manner. The FIR cannot be dismissed since the appellant is not in the business of taking deposits, according to an affidavit filed to the Court. The Investigating Officer has found at least prima facie
(i) that the appellant had engaged the services of 8 or 9 finance brokers, and
(ii) that the appellant had taken deposits from about 6540 depositors across the nation, totaling more than Rs.55 crores, through them and even directly.
As a result, it was held by the court that the learned single Judge bench was correct in declining to decide whether the appellant is carrying on the business of taking deposits or not, in a writ petition under Article 226 for quashing a FIR. As a result, the appellant’s first argument was rejected by the court.
- With regard to the second argument given by the appellants that the police have no jurisdiction under the TNPID Act to investigate an offence under the Act without the approval of the responsible authorities, the court put forward two points to consider. The first is whether we are allowed to consider, at least as persuasive value, the law put down by a learned Judge of this Court in P.S. Chellamuthu v. State. The second question is whether the Supreme Court’s issuance of a stay in P.S.Chellamuthu v. State precludes us from even considering this contention.
The Supreme Court’s ruling cannot be interpreted as a blanket order prohibiting police investigations and Special Court proceedings in all instances throughout Tamil Nadu. If this interpretation is correct, it means that the Supreme Court implicitly delayed the execution of the Act’s provisions after maintaining the Act’s constitutional legitimacy. As a result, the Supreme Court’s stay cannot be interpreted as a blanket immunity from prosecution by the police under the TNPID Act for all financial institutions.
It is true, as that if the appellant moves the Supreme Court against these orders, the grant of leave and stay would be automatic and imminent, given that P.S.Chellamuthu vs. State is already pending on the Supreme Court’s file on this very same issue. However, this does not prevent us from analysing the second point presented. As a result, we’ll address the second question.
The sole objective of the competent authority’s appointment, as stated plainly in Section 4 (1) of the Act, is to exercise control over the properties attached by the government under Section 3. Section 4 subsection (2) grants the competent authority such further authorities as may be required to carry out the Act’s objectives. Surprisingly, the goal isn’t to protect depositors, but rather to safeguard public savings.
The Act only gives this competent authority three types of powers: (I) exercising control over the properties attached by the government under Section 4(1), (ii) exercising such other powers as are necessary to carry out the Act’s purposes, and (iii) compounding an offence punishable under Section 5 prior to the institution of the prosecution.
Even if the court can disregard the reasonings given in the decision in P.S.Chellamuthu v. State on the basis that the Supreme Court granted a stay of execution of the said Judgment, court cannot come to any other conclusion about the police’s power to investigate an offence punishable under Section 5 of the TNPID Act.
In its whole, the appellant’s second argument overlooks one additional crucial fact. The FIR filed against the appellant and its Directors in Cr.No.05 of 2015 is not only for an offence under Section 5 of the TNPID Act, but also for an offence under Section 420 of the Indian Penal Code. The court was amazed as to why the Economic Offences Wing is unable to conduct an investigation into the offence under Section 420 IPC. As a result it was held that the second argument is similarly without validity. Therefore, the writ appeal was denied.
The judgement passed by the court is right and totally justified. The judge has looked into every small aspect of the situation and has rightly interpreted it in the light of the current laws, annexed evidences and previous judgements. The court has taken into consideration a lot of previous judgement like that of where a similar situation took place and has given its judgement in consonance of the principles laid down by these previous judgements.The Court was correct in declining to hear a writ petition for quashing a FIR filed under Article 226. The learned Judge’s ruling declining to intervene with a criminal complaint inquiry does not call for any interference. Any intervention with the inquiry, even at the FIR stage, would endanger the interests of over 6500 depositors who are owed a total of Rs. 55 crores. It would also put the interests of five separate banks in jeopardy, with a massive amount of Rs.189 crores owed to them. The judgement has been done considering all the depositor in the interest of public. This shows how the court has maintained a balance in its judgement.
This case had a great impact with relation to the laws governing the company which have been taking the deposits and was defaulting. It was found they were using the legal procedures to its own advantages by repeatedly making representations before several courts as well as even in the High Court. “Promises are like crying babies in a theatre, they should be carried out at once” was said by the court. As a result, the Court was correct in declining to decide whether the appellant is carrying on the business of taking deposits or not & FIR filed is within the purview of law.