Company’s non-joinder does not shield responsible directors from BUDS Act prosecution, Kerala High Court rules

The appellants, Accused Nos. 1 to 3, were respectively the Managing Director and Directors of Chirayath Benefit Fund Nidhi Limited (“Nidhi Ltd.”), a registered company.

The prosecution alleged that they accepted deposits from PW1 to PW3 by promising attractive interest rates, but failed to repay the deposits on maturity. PW1 deposited ₹15,15,000, PW2 ₹5,00,000, and PW3 ₹2,95,000, aggregating ₹23,10,000.

The deposit receipts were issued in the name of Nidhi Ltd. and were signed by its Managing Director. The company was not arraigned as an accused.

The appellants were prosecuted under Sections 406 and 420 read with Section 34 of the IPC, Sections 3, 4 and 22 of the Banning of Unregulated Deposit Schemes Act, 2019 (“BUDS Act”), and Section 5 of the Kerala Protection of Interests of Depositors in Financial Establishments Act, 2013 (“KPIDFE Act”).

The Special Court convicted the appellants under Sections 406 and 420 read with Section 34 IPC, Section 4 read with Section 22 of the BUDS Act, and Section 5 of the KPIDFE Act. It imposed concurrent two-year terms of simple imprisonment, fines under the respective provisions, and compensation to the depositors.

Whether the appellants could be prosecuted and convicted under the BUDS Act despite Nidhi Ltd., the deposit-taking company, not being arraigned as an accused?

Whether the evidence established the ingredients of criminal breach of trust under Section 406 read with Section 34 IPC?

Whether the appellants possessed dishonest intention from the inception so as to be guilty of cheating under Section 420 read with Section 34 IPC?

Whether the appellants committed fraudulent default under Section 4 read with Section 22 of the BUDS Act?

Whether the appellants were liable under Section 5 of the KPIDFE Act for default in repayment of deposits and interest?

Whether the conviction and sentence imposed by the Special Court required appellate interference?

The Court applied Sections 4, 22 and 25 of the BUDS Act: Section 4 prohibits fraudulent default by a deposit taker in repayment of deposits under a regulated scheme; Section 22 prescribes the punishment; and Section 25 extends deemed criminal liability to persons in charge of and responsible for the conduct of a non-individual deposit taker, in addition to the deposit taker itself.

Section 5 of the KPIDFE Act imposes liability on every person responsible for the management of a financial establishment that defaults in repayment of deposits or interest, while also providing for liability of the financial establishment.

For Section 406 IPC, the prosecution must prove entrustment and dishonest misappropriation, conversion, or use contrary to law or contract.

Section 420 IPC requires dishonest or fraudulent intention at the inception of the transaction; subsequent failure to repay, without proof of initial dishonest intention, does not by itself constitute cheating.

Relying on Saminathan G. v. State and Delhi Race Club (1940) Ltd. v. State of U.P., the Court held that cheating and criminal breach of trust cannot be sustained on the same set of allegations where their essential factual foundations are mutually inconsistent.

The Court also held that the non-arraying of a company does not, by itself, bar prosecution of persons independently brought within Section 25(1) of the BUDS Act.

The Court found that Nidhi Ltd. was a distinct registered company and that the deposits were accepted in its name; however, Section 25(1) of the BUDS Act expressly extends liability to persons who were in charge of and responsible for the company’s business.

Since the appellants were the Managing Director and Directors during the relevant period, and did not contend that they lacked responsibility for the company’s affairs, the company’s non-impleadment did not absolve them.

The evidence established that the depositors entrusted money to Nidhi Ltd. and that the amounts were not returned after maturity. The Court therefore upheld the findings under Section 406 IPC, the BUDS Act, and the KPIDFE Act.

However, PW1 admitted that interest had been paid for approximately one year. This circumstance made it unsafe to infer that the appellants had a dishonest intention at the inception of the transactions, an essential ingredient of Section 420 IPC.

The Court further held that the convictions for Sections 406 and 420 could not simultaneously rest on the same factual basis.

The conviction and sentence under Section 420 read with Section 34 IPC were set aside.

The convictions under Section 406 read with Section 34 IPC, Section 4 read with Section 22 of the BUDS Act, and Section 5 of the KPIDFE Act were confirmed.

The compensation payable from the fine imposed under the BUDS Act was enhanced to ₹35,00,000 for PW1, ₹14,00,000 for PW2, and ₹7,00,000 for PW3.

In all other respects, the sentence was confirmed, with the substantive sentences running concurrently.

The orders suspending sentence and granting bail were cancelled, and the appellants were directed to surrender before the Special Court, failing which the sentence was to be executed.