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Section 3 of the Act creates an offence in respect of a fraudulent default in the repayment of a deposit on maturity and provides for imprisonment upto six years and fine. Section 3 is as follows :

"3. Fraudulent default by Financial Establishment. - Any Financial Establishment, which fraudulently defaults any repayment of deposit on maturity along with any benefit in the form of interest, bonus, profit or in any other form as promised or fraudulently fails to render service as assured against the deposit, every person including the promoter partner, director, manager or any other person or an employee responsible for the management of or conducting of the business or affairs of such Financial Establishment shall, on conviction, be punished with imprisonment for a term which may extend to six years and with fine which may extend to one lac of rupees and such Financial Establishment also shall be liable for a fine which may extend to one lac of rupees. Explanation : For the purpose of this Section, a Financial Establishment, which commits default in repayment of such deposit with such benefits in the form of interest, bonus, profit or in any other form as promised or fails to render any specified service promised against such deposit, or fails to render any specific service agreed against the deposit with an intention of causing wrongful gain to one person or wrongful loss to another person or commits such default due to its inability arising out of impracticable or commercially not viable promises made while accepting such deposit or arising out of deployment of money or assets acquired out of the deposits in such a manner as it involves inherent risk in recovering the same when needed shall, be deemed to have committed a default or failed to render the specific service, fraudulently."

14. The law enacted by Parliament, incorporating the provisions of Section 58A, is in pursuance of the comprehensive power that is conferred upon Parliament by Article 246(1) read with Entries 43 and 44 of List I to regulate corporations which fall within the scope and purview of the aforesaid entry. Section 58A(3A) mandates that every deposit accepted by a company must be repaid in accordance with the terms and conditions of the deposit. Sub-Section (5) of Section 58A creates a criminal offence where a company "omits or fails" to repay the deposit. The expression "omits or fails" is wide enough to cover every default, Page 1001 even a fraudulent default on the part of a company. Under clause (b) of Sub-section (5) of Section 58A every officer of the company who is in default is liable to be punished with imprisonment which may extend to five years and to the payment of fine. Sub-section (9) of Section 58A empowers the Company Law Board to direct the company to make repayment of a deposit where it has failed to repay any deposit or part thereof in accordance with the terms and conditions governing the deposit. A failure to comply with an order of the Company Law Board, is a criminal offence under Subsection (10) of Section 58A, which is punishable with imprisonment which may extend to three years and to a fine as spelt out in the Section. The subsequent enactment by Parliament of Section 58AA is referable to the legislative head contained in Entries 43 and 44 of List I. Section 58AA makes a special provision in relation to small depositors and once again a failure to comply with the provisions of the Section or with an order of a Company Law Board constitutes a criminal offence which is punishable with imprisonment upto three years and a fine.

The Encroachment on the Union List .

15. The law enacted by the State Legislature in this case seeks to deal with fraudulent defaults by Financial Establishments. A fraudulent default within the meaning of the State Legislation covers essentially three situations: (i) A default on the part of a Financial Establishment in the repayment of a deposit with such benefits in the form of interest, bonus, profit or in any other form as promised; (ii) The failure to render a specified service promised or agreed against the deposit with an intention of causing wrongful gain to one person and wrongful loss to another person; and (iii) The commission of default due to an inability arising out of an impracticable or commercially not viable promise made while accepting the deposit or arising out of the deployment of money or assets acquired out of the deposit in a manner that would involve an inherent risk in recovery. A "fraudulent default" within the meaning of the State law is squarely comprehended within the meaning of the expression "omits or fails" to pay any deposit within the meaning of the Central Legislation in Section 58A(5). Section 58A(5) of the Companies' Act, 1956 is in fact much wider, covering within its ambit every kind of omission or failure to repay a deposit. An imprisonment of upto five years and fine is provided for an infraction under clause (b) of Sub-section (5) of Section 58A of the Central Legislation. A fraudulent default within the meaning of Section 3 of the State Act attracts a sentence of upto six years' imprisonment under the State Act and a fine which may extend to one lakh of rupees. The expression "Financial Establishment" Section 2(d) of the State legislation does not include a corporation or a Co-operative Society owned and controlled by the State or Central Government or a banking Company. This analysis, therefore, makes it abundantly clear that there is a substantial overlapping between the sanctions which are imposed by the State Act with those which have been provided for in the Central Legislation enacted in the form of Sections 58A and 58AA of the Companies' Act, 1956. The State Act goes on to make provisions in Section 4 for the Page 1002 attachment of properties in the event of a failure to return a deposit on maturity or on demand or to pay interest or to provide a service that was promised against a deposit. Similarly, when the Government has reason to believe that a Financial Establishment is acting in a calculated manner detrimental to the interest of the depositors with an intention to defraud them and if it is satisfied that such Financial Establishment is not likely to return the deposit or make payment of interest or other benefits that were assured, an order of attachment can be passed attaching the money or the property believed to have been acquired by the Financial Establishment. The Designated Court in Section 7(4) is empowered to issue directions for realisation of the assets that were attached and for the equitable distribution among the depositors of the money realised from out of the properties that are attached. The Legislation enacted by the State Legislature, in the present case, therefore, clearly and substantially encroaches upon the area of operation of Section 58A and Section 58AA of the Companies Act, 1956. The Supreme Court held that Section 58A is referable to Entries 43 and 44 of List I. This would apply to Section 58AA as well. The encroachment by the State legislation is on an area which falls within the exclusive legislative competence of Parliament in the Union List.

28. The question as to whether the legislation is with reference to public order must turn on the provisions which have been made by the Legislature. Now, those provisions do not, in our view, establish that this is a legislation with respect to public order. Section 3 of the Act penalises fraudulent defaults by financial establishments in the repayment of deposits. Section 4 provides for the attachment of properties on a default in the return of deposits. Sections 5 and 6 provide for the appointment of a Competent Authority and of Designated Courts; Section 7 deals with the power of the Designated Court to realise the assets and distribute the proceeds equitably among depositors and Section 8 provides for the attachment of property of mala fide transferees. None of these provisions would demonstrate that the pith and substance of the Act is in relation to public order. On the contrary, the substance of the Act is to deal with cases involving a fraudulent failure on the part of financial establishments to repay depositors and to secure the repayment to depositors of their deposits by the attachment of properties, avoidance of mala fide transfers, the realisation of the attached assets and by equitable distribution between depositors. The Act creates offences and provides for punishment of those offences in Section 3. The law enacted by the State Legislature is essentially a law which defines an offence with reference to a fraudulent default in the repayment of deposits. The law cannot, in pith and substance, be read and regarded as a law with reference to public order.