Home » Between The Lines » Inter-corporate deposit to fall outside the ambit of ‘deposit’ under the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999

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Ms. Batul Barodawala
Mr. Drushan Engineer
Ms. Ishita Mishra
Mr. Mahim Sharma
Ms. Rhea Sethi

In the recent judgment of Mr. Ashish Mahendrakar v. State of Maharashtra and Others (decided on September 13, 2019), the Hon’ble Bombay High Court declared that an inter-corporate deposit/loan, that is, a loan advanced/deposit made by a company with another company would not amount to a “deposit” within the meaning and for the purpose of the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999 (“MPID Act”).

Birla Power Solutions Limited (“Company”) had accepted deposits from 2009 to 2013. Shri Hajarimal Somai Memorial Trust (“Trust”) on March 09, 2012 had made a deposit of INR 1 crore with the Company. The deposit was to be repaid along with an interest of 10.75% per annum. The date of maturity of the deposit was March 08, 2013. However, the Company defaulted in the repayment of the principal amount and the interest.

Thus, Bhagwan Suryakant Seth filed a first information report against the Company, the managing director and other directors. Accordingly, an investigation was conducted and a charge-sheet was prepared. In the said chargesheet, Mr. Ashish Mahendrakar (“Petitioner”), one of the authorized signatories for the Company, who had executed important documents of the Company, had been indicted as accused number 11. MPID Special Case No. 4 of 2014 is pending before the special court (“MPID Case”).

In the meantime, the State of Maharashtra (“Respondent”), exercising its powers under Sections 4, 8 and 12 of the MPID Act, had issued two attachment orders dated March 19, 2016 and November 24, 2016. Further, a forensic audit was conducted with relation to the amounts accepted by the Company. The outstanding amount stated in the forensic audit included the amounts payable to the Trust.

Whether an inter-corporate deposit/loan registered under the provisions of the Companies Act, 1956 would amount to a deposit within the meaning and for the purpose of the MPID Act?

The counsel appearing for the Petitioner contended that an inter-corporate deposit/loan would fall outside the purview of the MPID Act and would be governed by the Companies Act, 2013 (“Companies Act”) and its rules. The definition of ‘deposit’ under Section 2(c) of the MPID Act, if properly construed, does not include inter-corporate deposits. Further, the counsel for the Petitioner asserted that inclusion of the inter-corporate deposits in the outstanding amount of the forensic audit and the consequent attachment orders by taking into account the outstanding amount is legally impermissible and therefore, requested the Bombay High Court to quash the names of the inter-corporate deposit holders/lenders from the list of depositors in the MPID Case.

The Petitioner submitted that the object of the MPID Act was to protect the interests of the public, that is, the middle class and poor people, from companies who would swindle their deposits by offering unprecedented higher rates of interests and awards. The aim of the MPID Act was not to govern inter-corporate debts or transactions. Secondly, the Petitioner submitted that inter-corporate transactions are regulated by the Companies Act. On the other hand, Chapter V of the Companies Act and the Companies (Acceptance of Deposits) Rules, 2014 (“Rules”) regulate the acceptance of deposits. In the definition of the term ‘deposits’ in the Rules, inter-corporate deposits have been specifically excluded. Lastly, it was stated by the Petitioner that since the Companies Act has been enacted by the central legislature, the provisions of the Companies Act, the rules framed thereunder, and other central legislations cannot be overridden by the provisions of the MPID Act, which has been enacted by the state legislature.

On the other hand, the counsel for the Respondent had submitted that the present matter lacked substance since the Petitioner did not have any locus to file the matter. This was because none of the attached properties were of the Petitioner. The Respondent further submitted, that the definition of ‘deposits’ in the MPID Act had an exhaustive list of exclusions and inter-corporate deposits was not part of this exclusion list. Therefore, MPID Act did govern inter-corporate deposits. Lastly, the Respondent had submitted that the purpose of the MPID Act was to provide an effective mechanism to help the investors, whether a corporate or non-corporate, who has been duped by the financial establishments.

The Bombay High Court observed that the Petitioner was arraigned in the charge-sheet as an accused, and thus, the Petitioner did have locus to file the present matter. The Bombay High Court then reviewed the definition of ‘deposit’ as per the MPID Act, which stated that term deposit covers receipt of money or acceptance of any valuable commodity, except those which have been specifically excluded in the definition.

Further, the Bombay High Court observed that the statement of objects and reasons in a statute cannot determine the true meaning and effect of the provisions of such statute, but it may provide a gainful reference for understanding the background of the legislation, the state of affairs that preceded the enactment, the attendant and surrounding circumstances in relation to the statute and the mischief which the statute sought to curb.

The Bombay High Court relied on New Horizons Sugar Mills Limited v. Government of Pondicherry through Additional Secretary and Another [(2012) 10 SCC 575] wherein the Supreme Court dealt with issues of the objects behind the enactment of, and the legislative competence to enact, the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act. The apex court had stated:

“In addition to the above, it has also to be noticed that the objects for which the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act were enacted, are identical, namely, to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust.

The three enactments referred to hereinabove, were framed by the respective legislatures to safeguard the interests of the common citizens against exploitation by unscrupulous financial establishments mushrooming all over the country. That is, in fact, the main object indicated in the Statement of Objects and Reasons of the three different enactments….We have to keep in mind the beneficial nature of the three legislations which is to protect the interests of small depositors.”

The Bombay High Court thus observed, that MPID Act and the enactments passed by other state legislatures were to protect the interests of the depositors. On reviewing the MPID Act, no distinction had been made between a corporate and an ordinary deposit. Further, the term ‘depositor’ had not been defined under the MPID Act.

The Bombay High Court also observed that a corporate entity while making a business decision should have a feel of the financial market. The entity should weigh in a number of factors before making such a decision such as the creditworthiness of the other company, the business model of such company, the financial condition and the corporate structure and governance of the company. Moreover, the company should check whether such other company would be able to honour its financial commitment. A company, having key personnel should make an informed decision and should not be easily lured by a mere promise of higher percentage of return on investments. According to the Bombay High Court, this was the reason why inter-corporate deposits were excluded from the definition of deposits in the Companies Act and its Rules.

Another angle taken by the Bombay High Court was that if the corporate depositors are clubbed with other depositors as investors, then this would be detrimental to the small time depositors as, if such corporate depositor would compete with the small depositors and claim pari passu distribution, then the small depositors would be deprived of realization of their money to the full potential.

The Bombay High Court held that an inter-corporate deposit/loan would not amount to a “deposit” within the meaning and for the purpose of the MPID Act. Thus, the petition was allowed and the inter-corporate loan for the proceedings leading to the MPID Case would not be taken into consideration for such proceedings.

Vaish Associates Advocates View
The Bombay High Court has justly observed that the MPID Act is to protect the rights of the small investors, that is, the middle and poor class and not that of the companies, which are expected to make informed decisions after due diligence and not be easily lured by mere promise of high returns on investments unlike an unsuspecting small time depositor. The intent of the MPID Act is to protect the interests of small depositors, who invest their life’s earnings and savings in schemes for making profit which are floated by unscrupulous individuals and companies, both incorporated and unincorporated. More often than not, the investors end up losing their entire deposits. Thus, the remedy provided by the MPID Act is for small investors and not for enforcement of rights of one corporate entity against another.

Further, Section 186 of the Companies Act provides for loan and investment by a company to another company. The remedy for a company having deposited in another company and where such company has failed to repay the depositor company, would be regulated by section 186 of the Companies Act and not the MPID Act.

For more information please write to Mr. Bomi Daruwala at [email protected]