M/S.Human Welfare Kuries And ... vs Union Of India
2021 Latest Caselaw 10950 Ker

         IN THE HIGH COURT OF KERALA AT ERNAKULAM

                            PRESENT

              THE HONOURABLE MR.JUSTICE N.NAGARESH

WEDNESDAY, THE 07TH DAY OF APRIL 2021/17TH CHAITHRA, 1943

                   WP(C).No.32012 OF 2019(B)


PETITIONER:

              M/s.HUMAN WELFARE KURIES AND LOANS PVT. LTD.,
              II/357-B, SILVER JUBILEE BUILDING,
              KANAL PALAM,
              KANJANY P.O.,
              KANJANAY,
              THRISSUR - 680612,
              REPRESENTED BY ITS CHAIRMAN.

              BY ADVS.
              SRI.LINDONS C.DAVIS
              SMT.E.U.DHANYA

RESPONDENTS:

     1        UNION OF INDIA,
              REPRESENTED BY ITS SECRETARY,
              MINISTRY OF FINANCE,
              NEW DELHI - 110 001.

     2        APPELLATE AUTHORITY OF NBFC REGISTRATION,
              DEPARTMENT OF FINANCIAL SERVICES,
              MINISTRY OF FINANCE,
              JEEVAN DEEP BUILDING,
              PARLIAMENT STREET,
              NEW DELHI - 110 001.

     3        RESERVE BANK OF INDIA,
              REPRESENTED BY ITS SECRETARY,
              CENTRAL OFFICE BUILDING,
              SHAHID BHAGAT SINGH MARG,
              MUMBAI - 400 001.

     4        EXECUTIVE DIRECTOR,
              RESERVE BANK OF INDIA,
              DEPARTMENT OF NON BANKING REGULATION,
              CENTRAL OFFICE, MUMBAI - 400 001.
 WP(C) No.32012/2019
                              :2 :


      5      REGIONAL DIRECTOR,
             RESERVE BANK OF INDIA,
             BAKERY JUNCTION,
             THIRUVANANTHAPUPRAM - 695 033.

             R1-2   BY SMT.H.SUBHALEKSHMI, CGC
             R1-2   BY SRI.P. VIJAYAKUMAR, ASGI
             R3-5   BY ADV. SRI.MILLU DANDAPANI, SC
             R3-5   SMT. SUMATHI DANDAPANI SR., SC

     THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 07-04-2021, THE COURT ON THE SAME DAY DELIVERED THE
FOLLOWING:
 WP(C) No.32012/2019
                               :3 :




                       JUDGMENT

~~~~~~~~~

Dated this the 7th day of April, 2021

The petitioner, a Non-Banking Financial Company,

is aggrieved by the cancellation of registration granted to the

petitioner by the Reserve Bank of India.

2. The petitioner states that the petitioner-Company

was incorporated in the year 1990 and it has been running chit

fund business from the date of incorporation. The petitioner

was granted Certificate of Registration on 19.02.2001 by the

Reserve Bank of India under Section 45-1A of the Reserve

Bank of India Act, 1934. The Company was engaged in

non-banking activities and chit business since 2001. The

Central Chit Fund Act, 1982 was enforced in Kerala on

30.04.2012. Thereafter, the petitioner did not start new chits

and continued only with Non-Banking Financial Activities. WP(C) No.32012/2019

3. The petitioner-Company was served with Ext.P1

show-cause notice dated 06.04.2018 of the Deputy General

Manager, RBI, alleging that the Company has received

inter-corporate loans from M/s.Ponallur Gold Trading Firm

(LLP) amounting to ₹7.75 Crores, that the Company sought

five years' time to repay the inter-corporate loan and the said

proposal was not acceptable to the RBI. It was further alleged

that the Company was continuing with three chits and an

amount of ₹6.45 Crores has been received as Kuri Security

Deposit (KSD) in the nature of public deposit. The proposal of

the Company to treat them as exempted deposits is

unacceptable and the Company has not given any road map

to refund all deposits in six months.

4. The petitioner-Company attended the hearing and

submitted Ext.P3 explanation in which the Company argued

that advances received from M/s.Ponallur Gold Trading Firm

are related party loans and not inter-corporate loans. The

Company undertook to repay the related party loans within

two years. A detailed plan was submitted. As regards Kuri WP(C) No.32012/2019

Security Deposits, the petitioner stated that those receipts are

from Chit subscribers and are security receipts and are future

receivables and should not be treated as public deposits.

5. Subsequently, on 05.12.2018, the Company

received a mail seeking clarification as to whether the

repayment of amount received from the LLP and KSD will be

achieved from existing chit business or through NBFC

activities. The petitioner submitted Ext.P4 reply stating that

the Company had already issued debentures and existing

liability of Kuri Security Deposit is reduced to ₹1.65 Crore.

The petitioner also provided a road map for clearing all the

liabilities.

6. However, the General Manager of the RBI issued

Ext.P5 order informing cancellation of Certificate of

Registration as per Ext.P6. The petitioner preferred an appeal

against Ext.P6, invoking Section 45-1A(7) of the Reserve

Bank of India Act. The Appellate Authority, without

appreciating the facts of the case, dismissed the appeal on

08.11.2019, as per Ext.P10, contended the petitioner. WP(C) No.32012/2019

7. The learned counsel for the petitioner argued that

in Ext.P10, the Appellate Authority has simply accepted the

version of the RBI. There is no proper independent

adjudication. The Appellate Authority ignored the fact that the

liabilities of the petitioner-Company were drastically reduced.

The Appellate Authority omitted to note that the amount

received by the petitioner-Company from the LLP is not

inter-corporate loan. The Appellate Authority further omitted to

note that after the implementation of the Chit Funds Act, 1982

in Kerala, the petitioner has not started any new chits and has

only continued with chits already commenced before the

implementation of the Chit Funds Act.

8. The learned counsel for the petitioner submitted

that implementation of Exts.P5, P6 and P10 orders will cause

huge loss and irreparable injury to the petitioner and it will be

detrimental to the interest of the general public at large. Huge

amounts are due from chit subscribers. The

petitioner-Company is running a business. Therefore, if the

Certificate of Registration is cancelled, it will affect the WP(C) No.32012/2019

petitioner-Company as well as public at large.

9. The learned counsel for the petitioner further

argued that Section 45-IA (6) will not attract in the petitioner's

case. The RBI has not given reasonable opportunity to the

petitioner to take corrective measures. The Company is in a

position to pay its liabilities in full. The Company is strictly

ensuring compliance of the Rules, Regulations and Guidelines

of the RBI. In the facts of the case, the petitioner-Company

should be permitted to continue its business.

10. The Standing Counsel for respondents 3 to 5

opposed the prayers in the writ petition. The Standing

Counsel submitted that the impugned orders have been

passed after following due process stipulated under Section

45-IA (6) of the RBI Act. The learned Standing Counsel

pointed out that KSDs are not subscriptions to chits, but public

deposits. The petitioner is a non-deposit taking Company.

The petitioner was required to give a clear road map/business

plan for refund of the deposits within six months. The

petitioner, however, sought five years' time, which was not WP(C) No.32012/2019

acceptable to the RBI. As regards Kuri Security Deposits

accepted by the Company, the Company required the RBI to

treat those deposits as exempted deposits. The petitioner did

not provide any plan to repay it.

11. The petitioner-Company has admitted that it has

accepted deposits from M/s. Ponallur Gold Trading Firm

(LLP). The petitioner, though a non-deposit taking Company,

is paying interest to the depositors. This is impermissible. It

was due to the violation of statutory provisions that the

Certificate of Registration of the petitioner-Company was

cancelled as per Ext.P6 order. Exts.P5, P6 and P10 orders

are without any legal infirmities. The writ petition is devoid of

any merit and it should be dismissed, contended the learned

Standing Counsel for the RBI.

12. I have heard the learned counsel for the petitioner

and the learned Standing Counsel for the RBI. I have also

heard the learned Central Government Counsel appearing in

the case.

WP(C) No.32012/2019

13. The reasons for cancelling the CoR issued under

the Reserve Bank of India Act to the petitioner, are:-

1. The Company has an LLP under the same group named M/s.Ponallur Gold Trading Firm and the Company has accepted inter-corporate loan of `7.5 Crores as on 31.05.2017. The road map of five years given by the Company for repayment of the said amount is unacceptable to the RBI.

2. As per audited balance sheet for 2015-'16 an amount of `6.45 Crores is seen under the head "Kuri Security Deposit" which is said to be caution deposits against default in case chit winners are unable to provide sufficient security. Interest is paid on these amounts and they are akin to public deposits, which the Company is not legally competent to accept. The Company was required to provide repayment schedule in respect of these deposits, which was not provided.

14. As regards inter-corporate loan from M/s.Ponallur

Gold Trading Firm (LLP), the petitioner's case is that the said WP(C) No.32012/2019

firm is accepting deposits on the basis of a licence issued by

the Commercial Taxes Department, Government of Kerala. As

soon as notice was received, the Company started to repay

the so-called inter-corporate loan. When notice from RBI was

received in this behalf, the outstanding loan was `7.75 Crores

as on 31.03.2017. This amount has been brought down to

`5.30 Crores by 24.05.2018. During the hearing held on

24.05.2018, the Company sought two years' time to repay the

related party loan. By 07.12.2018, the Company had brought

down the figure to `1.65 Crore, as is evident from Ext.P4. It is

when the Company was taking effective steps for statutory

compliance that the RBI has cancelled the CoR on

18.03.2019.

15. It has to be noted that the LLP from which the loan

was accepted is a related LLP. No complaints from public or

depositors were received relating to the transaction in

question. From the facts, it is evident that the Company has

been taking earnest efforts to repay the loan and in fact had

substantially reduced the loan burden from `7.45 Crores to WP(C) No.32012/2019

`1.65 Crore within 18 months. (By 31.03.2019, the liability

was again brought down to `85 lakhs). The Company had

sought only 24 months for compliance. Still, the request was

declined and CoR was cancelled.

16. Section 45-IA(6) of the RBI Act,1934 provides that

before cancelling registration on the ground of illegal/irregular

acceptance of deposits, unless the RBI is of the opinion that

the delay in cancelling the CoR shall be prejudicial to public

interest or interest of depositors, an NBFC can be given an

opportunity to comply with the provisions or fulfilment of such

condition. It of course is a discretionary power which has to

be exercised taking into account the facts and circumstances

of each case. In the present case, the RBI failed to note that

the Company had successfully brought down the related loan/

inter-corporate loan liability substantially within a short span

and would have been able to report full compliance, had the

road map proposed by the Company was approved. This fact

was omitted to be noted by the Appellate Authority, which has

a duty, power and responsibility to ensure that the RBI WP(C) No.32012/2019

exercises its discretion reasonably and prudently.

17. As regards the Kuri Deposit Receipts to the tune of

`6.45 Crores, the RBI as well as the Appellate Authority relied

on Section 12 of the Chit Funds Act,1982 to find fault with the

petitioner-Company. It is not in dispute that the Company has

not started any new Chit after the implementation of the Chit

Fund Act, 1982 in Kerala with effect from 30.04.2012 and the

Company was continuing only the then existing chits. Section

85 of the Act, 1982 in unequivocal terms states that the Act will

not apply to any chit started before the commencement of the

Act. Therefore, reliance placed by the RBI and the Appellate

Authority on the Chit Fund Act, 1982 is unsustainable.

18. The petitioner's case is that what was collected

from chit subscribers was Kuri Security. It is, in fact, advance

Kuri instalments. But, the pleadings would show that the

petitioner has been paying interest on these receipts.

Therefore, legality of such payment of interest and nature of

Receipts/Deposits, is to be decided. In view of Section 45-I

(bb)(v)(a), amounts received in the ordinary course of WP(C) No.32012/2019

business by way of security deposit, will not be 'deposit'.

Under Section 45-I(bb)(vii), any amount received by way of

subscriptions in respect of a chit will not be 'deposit'. If that be

so, the Kuri Security Deposit received by the petitioner as

security for payment of future chit subscriptions, whether

would fall within the definition of 'deposit' is a matter which

ought to have been considered by the Authorities.

19. Furthermore, the liability of the Company under Kuri

Security Deposit/Receipt was `6.45 Crores as on 25.05.2018.

At the time of hearing of appeal, the liability was brought down

to `2.53 Crores and later, to `1.65 Crore. In this case also,

deposits were made by chit subscribers and there is no

complaint from any chit subscribers.

20. In such circumstances, considering the entire facts

and circumstances of the case, this Court is of the considered

opinion that the case of the petitioner-Company requires

reconsideration at the hands of the statutory Appellate

Authority. The Appellate Authority is bound to consider

whether discretion has been exercised properly and fairly by WP(C) No.32012/2019

the RBI in the matter of rejection of road map given by the

petitioner for statutory compliances. The Appellate Authority

may also consider whether the cancellation of CoR is justified

in view of the peculiar facts of this case including steps taken

by the petitioner for statutory compliance and also whether

any punitive steps are warranted against the Directors of the

Company, in the facts of the case.

21. To enable the 2nd respondent-Appellate Authority to

consider the appeal afresh, Ext.P10 order is set aside. The

Appellate Authority shall consider and pass orders on the

appeal filed by the petitioner within a period of four months, in

the light of the observations made hereinabove, after giving an

opportunity of hearing to the petitioner.

Writ petition is disposed of as above.

Sd/-

N. NAGARESH, JUDGE

aks/30.03.2021 WP(C) No.32012/2019

APPENDIX PETITIONER'S EXHIBITS:

EXHIBIT P1 A COPY OF THE SHOW CAUSE NOTICE DATED 06-04-2018.

EXHIBIT P2 A COPY OF THE HEARING NOTICE 16-05-

2018.

EXHIBIT P3 TRUE COPY OF THE WRITTEN SUBMISSION DATED 25-05-2018 SUBMITTED ON BEHALF OF THE PETITIONER COMPANY.

EXHIBIT P4 TRUE COPY OF THE MAIL DATED 08-12-2018 ALONG WITH ROAD MAP FOR CLEARING LIABILITIES.

EXHIBIT P5 A COPY OF THE LETTER DATED 18-03-2019 ISSUED FROM THE OFFICE OF 5TH RESPONDENT.

EXHIBIT P6 TRUE COPY OF THE ORDER DATED 01-03-

2019 OF THE 4TH RESPONDENT.

EXHIBIT P7 TRUE COPY OF THE APPEAL MEMORANDUM (WITHOUT EXHIBITS) RECEIVED BY THE 2ND RESPONDENT ON 11-04-2019.

EXHIBIT P8 A COPY OF THE JUDGMENT DATED 17-04-

2019 IN WPC NO. 12404/2019.

EXHIBIT P9 A COPY OF THE ARGUMENT NOTES DATED 21-

08-2019.

EXHIBIT P10 A COPY OF THE ORDER OF THE 2ND RESPONDENT DATED 08-11-2019 ALONG WITH LETTER DATED 11-11-2019.

EXHIBIT P11 A COPY OF THE LETTER DATED 19-08-2019 ISSUED BY STATUTORY AUDITOR OF THE COMPANY.

EXHIBIT P12 A COPY OF LETTER ISSUED BY THE COMPANY TO 5TH RESPONDENT DATED 23-11-2019.

WP(C) No.32012/2019

EXHIBIT P13 A TRUE COPY OF THE LETTER OF PERSONAL HEARING FROM RBI DATED 16/5/2018 IS ANNEXED HEREWITH AND MARKED AS EXHIBIT P13

EXHIBIT P14 A TRUE COPY OF THE LETTER DATED 20/5/2018 IS ANNEXED HEREWITH AND MARKED AS EXHIBIT P14

EXHIBIT P15 A TRUE COPY OF THE E-MAIL DATED 23/5/2018 IS ANNEXED HEREWITH AND MARKED AS EXHIBIT P15

EXHIBIT P16 TRUE COPY OF THE MASTER DIRECTION DATED 25/8/2016 IS ANNEXED HEREWITH AND MARKED AS EXHIBIT P16 EXHIBIT P17 TRUE COPY OF THE CHARTERED ACCOUNTANT CERTIFICATE DATED 17.02.2020 IS ANNEXED HEREWITH AND MARKED AS EXHIBIT P17

RESPONDENT'S/S EXHIBITS:

EXHIBIT R3 (A)        TRUE COPY OF THE NOTIFICATION BEARING
                      NO.DCF (COC) NO.99/ED (JRP) -97 DATED
                      06.03.1997

EXHIBIT R3 (B)        TRUE COPY OF THE MASTER CIRCULAR
                      BEARING    NO.    DNBS.PD.CC    No.336/

03.02.2004/2013-14 DATED 01.07.2013

EXHIBIT R3 (C) TRUE COPY OF THE DIRECTION DATED 28.08.2009 ISSUED BY THE RBI,PROHIBITING THE CHIT FUND COMPANIES FROM ACCEPTING DEPOSITS.

EXHIBIT R3 (D) TRUE COPY OF THE COMMUNICATION OF THE MINISTRY OF CORPORATE AFFAIRS BEARING NO.F.NO.1/12/2012 CL-V DATED 19.10.2012 ANNEXURE R3 (A) TRUE COPY OF THE MINUTES OF THE PERSONAL HEARING CONDUCTED ON MAY 25, 2018.

SR