Kerala/Gujarat Money Lenders Act have no application to NBFCs: SC

Case Details: Nedumpilli Finance Co. Ltd. v. State of Kerala - [2022] 138 taxmann.com 191 (SC)

Judiciary and Counsel Details

• • Hemant Gupta & V. Ramasubramanian, JJ.

Facts of the Case

In the instant case the question that arose before the Apex Court for consideration was as to whether Non-Banking Financial Companies (for short “NBFCs”) regulated by the Reserve Bank of India could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 (hereinafter referred to as “Kerala Act”) and Gujarat Money Lenders Act, 2011 (hereinafter referred to as “Gujarat Act”).

Supreme Court Held

The Court held that one of the objects the RBI Act, 1934 is “to operate the currency and credit system of the country to its advantage”.

The Court observed that the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their incorporation till the time of their closure, all activities of NBFCs automatically come under the scanner of RBI. As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the RBI Act itself.

The power to determine policy and issue directions, available under Section 45JA can always be invoked by RBI.

The Court highlighted that the Section 45L(1)(b) confers power upon the RBI to give directions to NBFCs “relating to the conduct of business by them”. Therefore, to say that RBI has no power in respect of such an important aspect, may not be correct. The fact that RBI generally leaves it to the market forces to determine the rate of interest, without any direct intervention, is not something that could be taken advantage of by the State of Kerala to step in and prescribe the maximum rate of interest chargeable by NBFCs on the loans advanced by them.

In view of the above, the Apex Court concluded that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI.

No vicarious liability of persons u/s 141 of NI Act unless Co. or firm has committed an offense as principal accused: SC
Dilip Hariramani v. Bank of Baroda – [2022] 138 taxmann.com 186 (SC)

In the instant case, the respondent – Bank of Baroda, had granted term loans and cash credit facility to a partnership firm – M/s. Global Packaging. It was alleged that in part repayment of the loan, the Firm, through its authorised signatory, Simaiya Hariramani, had issued three cheques of Rs. 25,00,000/- each.

However, the cheques were dishonoured on presentation due to insufficient funds. The Bank, through its Branch Manager, issued a demand notice to Simaiya Hariramani under Section 138 of the NI Act and thereafter , filed a complaint under Section 138 of the NI Act, against Simaiya Hariramani and the appellant, a partner of firm.

The Firm was not made an accused. The appellant and Simaiya Hariramani were convicted by the Judicial Magistrate First Class, Balodabazar, Chhattisgarh, under Section 138 of the NI Act. The High Court dismissed appeal of the appellant.

On appeal, the Apex Court held that the provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable.

The Court stated that the Section 141 of the NI Act extends vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of Section 141 has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished. However, such vicarious liability arises only when the company or firm commits the offence as the primary offender.

In view of the above, the Apex Court set aside the impugned judgment of the High Court which confirmed the conviction and order of sentence passed by the Sessions Court, and the order of conviction passed by the Judicial Magistrate First Class.