Case Law Details
Ulliyeri Sree Nidhi Limited Vs Union of India (Kerala High Court)
The Kerala High Court’s recent ruling on Nidhi Companies underscores the importance of regulating financial activities within the bounds of the law without rendering their operations impossible due to excessive restrictions. The court recognized the need for a reasonable regulatory framework, especially when public money is involved.
In response to the concerns raised by Nidhi Companies regarding the recent amendments to Section 406 of the Companies Act, 2013, the court emphasized the necessity of striking a balance between regulation and operational feasibility. The companies argued that the amendments, along with certain rules, would make it impossible for them to comply and maintain their status as Nidhi Companies.
On the other hand, the Solicitor General of India highlighted the need for effective regulation due to complaints about malpractices by Nidhi Companies, which often affected small investors adversely. The government’s intention was to prevent such malpractices and protect investors’ interests through enhanced regulatory oversight.
The court’s directions aimed to address these concerns while ensuring compliance with the law. It deferred coercive actions against the petitioners but imposed limitations on their operations, such as restricting new member enrollments and requiring compliance with deposit and loan guidelines. The court also allowed the petitioners to apply for compounding of offenses committed earlier, subject to certain conditions.
Furthermore, the court refrained from deciding on the legality of the amendments and granted petitioners the liberty to approach the competent authority for compounding offenses. This approach aimed to provide flexibility while maintaining accountability.
Overall, the court’s ruling reflects a nuanced understanding of the challenges faced by Nidhi Companies and the importance of balancing regulatory measures with the need for operational viability.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The petitioners in these cases are stated to be ‘Nidhi Companies”, operating under the Companies Act, 1956; or having been registered subsequently, under the Companies Act, 2013.
2. All the petitioners call into question the amendments brought to Section 406 of the Companies Act, 2016, through Act 1 of 2018, whereby, the obtention of declaration as a ‘Nidhi Company’ has been made mandatory; and they assert that this marks a deviation of the statutory regime applicable until now, taking it back to the era of the Companies Act, 1956, under which Section 620A thereof, required such declaration as a mandatory requisite. They assert that,under the guise of regulation – which they concede can be, as long as it is reasonable – what is being done, through the impugned amendments to the Nidhi Rules, 2014, particularly Rules 3A and 23A of it, is that very cumbersome, if not impossible, conditionsare being imposed, which is not possible for any of them to comply with; and hence that as matters now stand, many of them – if not all – stand denuded of their status as a ‘Nidhi Company’; thus now being able to operate only under the interim orders of this Court in these matters. They thus challenge the amendments brought into Section 406 of the Companies Act, 2013, through Act 1/2018; as also the corresponding amendments endrafted into the Nidhi Rules, 2014, namely Rules 3A and 23A thereof, as being illegal, unlawful and unconstitutional.
3. However, in response, the learned Deputy Solicitor General of India – Sri.S.Manu, submitted that the primary reason, which persuaded the Government of India to consider an effective regulatory mechanism for ‘Nidhi Companies’, was that complaints were being received on a regular basis from various sources, including stake holders, State Level Co-ordination Committees and such other, regarding deleterious malpractices indulged by various “Nidhi” companies like: in refusing repayment of matured amount with interest; in luring members with exorbitant promises and expensive gifts like phones etc, through advertisement and then blatantly violating them; in refusing permission to members to withdraw from their own amounts; and, in some cases, where Directors and Promoters absconded, so as to avoid repayment of deposit by small investors. He submitted that with such complaints becoming commonplace, inspections, enquiries and investigations were conducted under the Companies Act, 2018; and consequently, it was found that, unless their operations are well regulated and brought under an effective monitoring scanner, it would benefit no one, but would operate as a great detriment to bonafide investors, who are generally from small towns and who make small investments from their hard earned money.
4. Sri.S.Manu, then argued that, therefore, the factum of Section 406 of 2013 Act having been originally drafted in such manner, without the rigor of having to obtain a declaration, could not have stood in the way of the Parliament in amending the said provisions, so as to bring the ‘Nidhi Companies’, within the ambit of essential regulation; and that the subsequent amendment in the “Rules” were only in such direction and hence, laudable in its intent. He thus prayed that these writ petitions be dismissed; alleging that it is rendered perspicuous that the real purpose of the challenge in these cases, is for the ‘Nidhi Companies’ to avoid all kind of regulatory glance, thus to enable them to operate in any manner that they deem fit, which is deleterious to the economy and to the investors at large.
5. After I heard the parties in some detail on the afore lines on 22.11.2023 – when these Writ Petitions were earlier listed, I had issued the following order, which is self explanatory:
“Admit.
The learned Deputy Solicitor General of India takes notice on behalf of respondents.
Post on 24.11.2023; until which time, all coercive action against the petitioner shall stand deferred; however, clarifying that they shall not enroll any new members beyond 10% of the existing membership.
It shall also be ensured by the petitioner that all deposits and loans to new members will be in compliance with the guidelines provided under the Companies Act, 1956, as also the Nidhi Rules, 2014; and I leave liberty to the respondents to take necessary action, if there is any violation in this regard.
The petitioner is also directed not to create any charge over the deposit of the members and they will be obligated to file returns as required in law, which will be subject to further orders in this case.”
6. Subsequently, Statements have been filed by the leaned Deputy Solicitor General of India, averring that, if the petitioner – companies are interested and so desirous, the new regime can be streamlined, so as to give them an opportunity to make fresh applications under “NDH-4” format as is mandated under the “Nidhi Rules, 2014”, however, on condition that they apply for compounding of all offences committed qua the pre-amendment era. He explained that, if the Nidhi Companies are able to compound all such offences and then apply for a fresh declaration under Form No.”NDH-4”, the same will be considered and evaluated, including after giving each of them opportunity of explaining any objection to be raised with respect to the same. He explained that, since the contentions of the petitioners are common, that the conditions imposed upon them under the amended ‘Act’ and the “Nidhi Rules, 2014” is cumbersome and in some cases, allegedly impossible, the afore suggested course will allay them substantially, if not fully. He re-affirmed that, if the “Nidhi Companies” are to apply for compounding the offences committed earlier, it would be considered in the afore perspective and with the empathy it deserves; but, of course, after verifying and confirming absence of criminality, on a case-to-case basis. He thus offered that if this course. is acceptable to the petitioners, then this Course may pass appropriate orders, modulating these events to take place in future, appositely.
7. Sri.P.B.Krishnan; Sri.Sreekumar Chelur and Sri.Ebin Mathew – learned counsel appearing for some of the petitioners in these cases, as also the other learned counsel in the other matters, conceded that a fair amount of regulation, as is forensically permitted, cannot be objected to by the ‘Nidhi Companies’. They reiterated that their clients have been forced to come to this Court because, they were faced with the prospect of being burdened with large sums as compounding fees – which Sri.Ebin Mathew pointed out, is as high Rs.75,000/- to Rs.85,000/- per offence – and then be facing the prospect of their “NDH” applications being rejected, as has been demonstrated in many of these cases, for frivolous reasons and on conditions which are impossible to perform. They submitted that, therefore, if this Court, taking cue from the suggestion of the learned Deputy Solicitor General of India, is to modulate the manner in which these processes are to be handled by the competent Authorities, they would not stand in the way of such orders being issued; however, praying that the constitutional challenge to the provisions, including to Section 406 of the Companies Act, 2013 be left open in such event, so as to be impelled in future, if it becomes so warranted.
8. In fact, the learned counsel submitted, as an alternative, that, if for any reason, it is found that the suggestions afore made by the learned Deputy Solicitor General of India is found not feasible in practical operation, when it is attempted, then, they be reserved liberty to seek a rehearing of these matters, on the grounds of the constitutional challenge already impelled.
9. Sri.Sandesh Raja – learned counsel for the petitioners in WP(C)No.29643/2023, WP(C)No.31538/2023, WP(C)No.32022/2023 & WP(C)No.36872/2023, at this time, added to the afore submissions saying that, the impugned orders – whereby, the “NDH 4” applications have already been rejected – are also illegal for the reason that it has been done not by the Government of India, but by a statutorily incompetent Authority. He added that the reasons stated therein are also incompetent and hence prayed that they be set aside, so that the process of reconsideration – assuming that this Court is considering such a course – can be taken forward dispassionately and without legal impediment. He, however, prayed that his client’s contentions regarding the invalidity of the rejections earlier ordered be left open to be pursued in future, if it becomes so necessary.
10. The afore narrative of facts and submissions make it indubitable that, as in the case of any right vested to any individual or class of persons/entities, necessary regulatory mechanism and reasonable restrictions are desideratum, if not imperative, especially when public money is involved. Such cannot be challenged, if they are reasonable in nature and are within the constitutional perimeter.
11. The question in this case is whether the statutory restrictions now placed in the operation of the various ‘Nidhi Companies’ – some of whom say, they have been operating for several decades in the past – can be construed to be reasonable, or is oppressive or capricious.
12. Though, I do not propose to answer the contentions of the petitioners qua the constitutional challenge of the provisions affirmatively, I must record peripherally that what they are obviously concerned about is that the old regime – where ‘Nidhi Companies’ were controlled by the Government, under Section 620A of the Companies Act, 1956 – has been now sought to be brought in through the amendment to Section 406 of the Companies Act, 2013, particularly after the amendment to it, vide Act 1/2018. Their adjunct contention is that, when Section 406 of the Companies Act, 2013, has been so amended, it then authorised the Government to bring in changes to the Nidhi Rules, 2014, to en-draft Rules 3A and 23A therein, whereby, even their existence and operations becomes impossible, when their declaration in NDH-4 is rejected – which they say have been done in practical experience, for reasons that are wholly trivial, or even undisclosed.
13. There is certainly some force in the afore apprehensions of the “Nidhi Companies” because, even when it is well established in law that any financial activity ought to be regulated reasonably within the ambit of law, it cannot glissade into a situation where its operations become impossible, or are defeated by oppressive or impossible restrictions and regulations.
14. As matters now stand, the singular reason why the petitioners have approached this Court, against the amendments to Section 406 of the Companies Act, 2013, as also against Rules 3 and 23A of the Nidhi Rules, 2014, is because, according to them, they are oppressive.
15. Prima facie, however, I must say that the argument, that the afore provisions are oppressive, would require further scrutiny because, at first blush, the impugned regulatory mechanism appears to be far less exacting than what the Reserve Bank holds over financial entities like banks or NBFCs; and this is admitted by all the learned counsel for the petitioners also.
16. But, as I have already said above, I propose not to answer the afore and to leave them open for the time being because, as seen above, during the hearing of these matters, the learned counsel for the petitioners have conceded that the suggestion of the Deputy Solicitor General of India can be given an opportunity of being put to operation and to work, subject, of course, to their request for rehearing, if they are to encounter impediments in future.
17. To summate, before consideration of the validity of the impugned amendments on its merits, I am of the view, as is also conceded, that an opportunity be given to see whether the “Act” and the “Rules” can be allowed to operate, without causing an oppressive impediment to the petitioners, in either obtaining registration, or in continuing with their operations – as the case may be. This is more so because, it is fundamental in interpretation of statutes that every attempt ought to be made to allow it operate to the extent possible and that it will be set aside, only if it is found to be so incapable, on grounds of arbitrariness, capriciousness or arbitrariness.
18. Since there is hardly in dispute at the bar, that reasonable restrictions are permissible, if not necessary, I deem it appropriate that these writ petitions be ordered with the following directions;
a) The challenge to the amendments to Section 406 of the Companies Act, 2013, as also to the “Nidhi Rules, 2014” – as impelled in these writ petitions – are left undecided and kept open for future consideration, if it becomes so warranted.
b) Each of the petitioners in these cases will be at liberty to approach the competent Authority, for compounding the offences alleged against them; and if such are made within a period of two months from the date of receipt of a copy of this judgment, they shall be considered by the said Authority with the maximum empathy requisite; thus leading to the imposition of the least sum of penalty, as permissible in law – however, subject to the evaluation and determination of such, on a cas-to-case basis by the competent Authority. But, these protections will not apply in a case where criminality is suspected, or found, or in which action under the criminal law is
initiated or proposed; in which event, the respective petitioners will be informed to the same appositely.
c) On the offences committed by the petitioner – Nidhi Companies, if any, being compounded in terms of the afore directions, they will be at liberty to apply afresh, in the format prescribed as per the “NDH Form”; and if this is done, it will be considered dispassionately and without being trammeled or influenced by the earlier rejections, and dehors the orders qua the same; and appropriate new orders and necessary action issued and completed thereon, without any avoidable delay, but not later than three months from the date of the receipt of the application.
d) If, on the contrary, the competent Authority is to find any objection with the applications of the petitioner – “Nidhi Companies” under the “NDH” Format, they shall not reject it peremptorily, but will notify each of them appropriately through apposite proceedings, intimating them of such and giving them a minimum of one month to rectify the same, to be then resubmitted as per law. Should there be any further defects still found to be subsisting, the Authority will then hear the respective applicants and give them such necessary further time as may be fixed, to rectify them, before taking a final decision.
Needless to say, until such time as the afore exercise is completed and the resultant order communicated to the petitioners – in case where they comply with direction (a) above and make fresh application in “NDH 4” format, within the time frame fixed in direction (b) above – the interim order granted by this Court in these matters, will continue to hold field.
After I dictated this part of the judgment, some learned counsel appearing for other petitioners submitted that there are cases in these batches where their clients have not filed “NDH 4” forms yet, as also Form No.SH 7. They prayed that the benefit of the afore declaration be made available to them also. The learned Deputy Solicitor General of India did not oppose this and consequently, I order that it is not in the case of those companies where their Forms have been rejected who would get the afore benefit, but also those who want to make application, in terms of law.
To be spoken to on 19.03.2024
These matters have been listed today for being spoken to at the request of some of the learned counsel for the petitioners, submitted that, on account of the rigour of the impugned Statutory amendments, the Share of Capital of their clients cannot be raised; and that this puts them in a rather incongruous situation because, without such an enhancement, they cannot achieve the qualifications of ‘Nidhi Company’ under law; while, when they try to do that, they are interdicted by the requirement of filing Statutory Forms.
I am sure that this is a piquant situation for the petitioners because, unless they are able to raise their capital to the level as is statutorily mandated, they would not be able to operate as a ‘Nidhi Company’, much less obtain any benefit under this judgment.
Sri.Ajith Kumar – learned Central Government Counsel, in response, submitted that, if the raising of capital is solely so as to bring the ‘Nidhi’ Companies within the threshold limit of the Statutory prescription, his client will not stand in the way of appropriate orders being issued.
In the afore circumstances, in addition to the afore directions, I order that the competent Authorities will permit the petitioners to raise their capital within the threshold limit as per the Statutory requirement; for which purpose, all applications and requirements for such will be acceded to, subject to other mandatory requirements being satisfied.
Needless to say, if the petitioners require any clarifications in future, on the working of the afore directions, they will be at liberty to approach this Court through appropriate applications.
Author Bio
